PART I
Except for historical information contained in this report, the
matters discussed are forward-looking statements that involve risks
and uncertainties. When used in this report, words such as
“anticipates”, “believes”,
“could”, “estimates”,
“expects”, “may”, “plans”,
“potential” and “intends” and similar
expressions, as they relate to the Company or its management,
identify forward-looking statements. Such forward-looking
statements are based on the beliefs of the Company’s
management, as well as assumptions made by and information
currently available to the Company’s management. Among the
factors that could cause actual results to differ materially are
the following: the effect of business and economic conditions; the
effect of the dramatic changes taking place in IT and healthcare;
continuation of the GEHC agreements; the impact of competitive
technology and products and their pricing; medical insurance
reimbursement policies; unexpected manufacturing or supplier
problems; unforeseen difficulties and delays in the conduct of
clinical trials and other product development programs; the actions
of regulatory authorities and third-party payers in the United
States and overseas; and the risk factors reported from time to
time in the Company’s SEC reports. The Company undertakes no
obligation to update forward-looking statements as a result of
future events or developments.
Unless the context requires otherwise, all references to
“we”, “our”, “us”,
“Company”, “registrant”, “Vaso”
or “management” refer to Vaso Corporation and its
subsidiaries.
General Overview
Vaso
Corporation principally operates in three distinct business
segments in the healthcare equipment and information technology
industries. We manage and evaluate our operations, and report our
financial results, through these three business
segments.
●
IT segment,
operating through a wholly-owned subsidiary VasoTechnology, Inc.,
primarily focuses on healthcare IT and managed network technology
services;
●
Professional sales
service segment, operating through a wholly-owned subsidiary Vaso
Diagnostics, Inc. d/b/a VasoHealthcare, primarily focuses on the
sale of healthcare capital equipment for General Electric
Healthcare (“GEHC”) into the health provider middle
market; and
●
Equipment segment,
primarily focuses on the design, manufacture, sale and service of
proprietary medical devices, operating through a wholly-owned
subsidiary VasoMedical, Inc., which in turn operates through
Vasomedical Solutions, Inc. for domestic business and Vasomedical
Global Corp. for international business, respectively.
VasoTechnology
VasoTechnology,
Inc.
was formed in May
2015, at the time the Company acquired
all of the assets of NetWolves, LLC and its
affiliates, including the membership interests in NetWolves Network
Services LLC (collectively, “NetWolves”)
, to
address a major issue facing the healthcare IT industry. It
currently consists of a managed network and security service
division (NetWolves) and a healthcare IT application VAR (value
added reseller) division (VasoHealthcare IT). Its current offering
includes:
●
Managed diagnostic
imaging applications (national channel partner of GEHC
IT).
●
Managed network
infrastructure (routers, switches and other core
equipment).
●
Managed network
transport (FCC licensed carrier reselling 175+ facility
partners).
●
Managed security
services (partner with major cybersecurity technologies firms
including IBM and Palo Alto).
VasoTechnology uses
a combination of proprietary technology, methodology and
best-in-class third-party applications to deliver its value
proposition.
VasoHealthcare
VasoHealthcare
commenced operations in 2010, in conjunction with the
Company’s execution of its exclusive sales representation
agreement with GEHC, which is the healthcare business division of
the General Electric Company (“GE”), to further the
sale of certain medical capital equipment in domestic market
segments. Sales of GEHC equipment by the Company have grown
significantly since then.
VasoHealthcare’s
current offering consists of:
●
GEHC diagnostic
imaging capital equipment.
●
GEHC service
agreements for the above equipment.
●
GEHC and third
party financial services for the above equipment.
VasoHealthcare has
built a team of over 80 highly experienced sales professionals who
utilize proprietary sales management and analytic tools to manage
the complete sales process and to increase market
penetration.
VasoMedical
The
proprietary medical equipment business now all under VasoMedical
dates back to 1995 when the Company began the external
counterpulsation technology in the United States. Vasomedical
Global was formed in 2011 to combine and coordinate the various
international operations including design, development,
manufacturing, and sales of medical devices, while domestic
activities are under Vasomedical Solutions. These devices primarily
consist of cardiovascular diagnostic and therapeutic systems. Its
current offering consists of:
●
Biox™ series
Holter monitors and ambulatory blood pressure
recorders.
●
ARCS™ series
analysis, reporting and communication software for physiological
signals such as ECG and blood pressure.
●
MobiCare™
multi-parameter wireless vital-sign monitoring system.
●
EECP
®
therapy
systems, used for non-invasive, outpatient treatment of ischemic
heart disease.
This
segment uses its extensive cardiovascular device knowledge coupled
with its engineering resources to cost effectively create and
market its proprietary technology. It sells and services its
products to domestic customers directly and sells and/or services
its products in the international market mainly through independent
distributors.
Historical Background
Vaso
Corporation was incorporated in Delaware in July 1987. For most of
its history, the Company primarily was a single-product company
designing, manufacturing, marketing and servicing its proprietary
Enhanced External Counterpulsation, or EECP
®
,
therapy systems, mainly for the treatment of angina. In 2010 it
began to diversify its business operations. The Company changed its
name to Vaso Corporation in 2016 to more accurately reflect the
diversified nature of its business mixture, and continues to use
the original name VasoMedical for its proprietary medical device
subsidiary.
In May
2010, the Company launched its Professional Sales Service business
through a wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a
VasoHealthcare, which was appointed the exclusive representative
for the sale of select GE diagnostic imaging equipment to specific
market segments in the 48 contiguous states of the United States
and the District of Columbia. The original agreement (“GEHC
Agreement”) was for three years ending June 30, 2013; it has
been extended several times with the current extension through
December 31, 2022, subject to earlier termination under certain
circumstances.
In June
2014, the Company began its IT segment business by concluding the
Value Added Reseller Agreement (“VAR Agreement”) with
GEHC
to become a national value added
reseller of GEHC Digital’s software solutions such as Picture
Archiving and Communication System (“PACS”), Radiology
Information System (“RIS”), and related services,
including implementation, training, management and support. This
multiyear VAR Agreement focuses primarily on existing customer
segments currently served by VasoHealthcare on behalf of GEHC. A
new wholly owned subsidiary, VasoHealthcare IT Corp. (“VHC
IT”), was formed to conduct the healthcare IT
business.
In May 2015, the Company further expanded its IT
business segment by acquiring all of the assets of NetWolves, LLC
and its affiliates, including the membership interests in NetWolves
Network Services, LLC (collectively, “NetWolves”),
pursuant to an asset purchase agreement. NetWolves designs and
delivers efficient and cost-effective multi-network and
multi-technology solutions as a managed network provider, and
provides a complete single-source solution that includes design,
network redundancy, application device management, real-time
network monitoring, reporting and support systems as a
comprehensive solution.
The Company believes there are
significant operational synergies between NetWolves’
capabilities and VasoHealthcare IT’s requirements under its
VAR Agreement with GEHC, and has expanded NetWolves’ existing
services to the healthcare IT market.
The
Company’s Equipment business also has been significantly
expanded from the original EECP
®
-only
operations. In September 2011, the Company acquired FGE, a British
Virgin Islands company, which owns or controls two Chinese
operating companies - Life Enhancement Technology Ltd.
(“LET”) based in Foshan, China, and Biox Instruments
Co. Ltd. (“Biox”) based in Wuxi, China, respectively -
to expand its technical and manufacturing capabilities and to
enhance its distribution network, technology, and product
portfolio. Biox is a variable interest entity (“VIE”)
controlled by FGE through certain contracts and an option to
acquire all the shares of Biox.
In
August 2014, the Company acquired all of the outstanding shares of
Genwell Instruments Co. Ltd. (“Genwell”), located in
Wuxi, China. Genwell was formed in China in 2010 with the
assistance of a government grant to develop the MobiCare™
wireless multi-parameter patient monitoring system and holds
intellectual property rights for this system.
As a result,
the Company has now expanded its equipment products portfolio to
include Biox™ series ambulatory patient monitoring systems,
ARCS™ series software for ECG and blood pressure analysis,
and the MobiCare™ patient monitoring device. In 2017, as an
effort to further reduce engineering and production cost of its
EECP
®
products, the Company moved the operations of LET from Foshan,
China to Biox in Wuxi, China, and closed LET in 2018.
In April 2014, the Company entered into a
cooperation agreement with Chongqing PSK-Health Sci-Tech
Development Co., Ltd. (“PSK”) of Chongqing, China, the
leading manufacturer of external counter pulsation, or ECP, therapy
systems in China, to form a joint venture company, VSK Medical
Limited (“VSK”), a Cayman Islands company, for the
global marketing, sale and advancement of ECP therapy technology.
The Company owns 49.9% of VSK, which commenced operations in
January 2015. In March 2018, the Company terminated the cooperation
agreement with PSK and sold its shares in VSK to PSK. The Company
continues to cooperate with VSK by granting it distribution rights
for EECP
®
systems in certain geographic
territories of the world.
Management
The
Company currently bases its headquarters in Plainview, Long Island,
NY and maintains an office in Manhattan, NY. Reporting to the Board
of Directors, corporate officers of the Company include the
President and Chief Executive Officer (“CEO”), Chief
Financial Officer (“CFO”), Chief Operating Officer
(“COO”), and Vice President of Finance and
Treasurer.
The
management of the Company’s IT segment is led by the COO of
the Company, who is also the President of VasoTechnology and
NetWolves, which is based in Tampa, FL. Our VasoHealthcare IT VAR
business is organized as a part of VasoTechnology and is also led
by the COO, supported by several software solution sales and
implementation specialists, based in Nashville, TN. The business
unit works with our VasoHealthcare diagnostic imaging equipment
sales team to generate leads and potential clients for the software
solutions products and works with NetWolves sales and technical
teams for comprehensive IT product and service
offerings.
In the
professional sales services segment, we sell GEHC diagnostic
imaging products to our assigned market through a nationwide team
of approximately 65 sales employees led by its executive team and
nine regional managers who report to the President of
VasoHealthcare. The operation is also supported by in-house
administrative, analytic and other support staff, as well as
applicable GEHC employees.
The
equipment segment is under the direct supervision of the CEO of the
Company. Sales and marketing efforts in the domestic market are led
by a Vice President of national sales and service at Vasomedical
Solutions, and the managers of our China subsidiaries are in charge
of the development and production of all our proprietary products
and marketing and sales in the international markets. We have
marketed our EECP
®
systems
internationally through distributors, including VSK Medical, in
various countries throughout Europe, the Middle East, Africa, Asia
and Latin America. We sell our Biox™ series and other
products in China by a group of sales managers as well as through
distributors covering various regions of China and other
international geographies.
Competition
In the
U.S. diagnostic imaging market where we sell GE products, our main
competitors include Siemens, Philips, Canon, and Hologic. Key
competitive factors in the market include price, quality, finance
availability, delivery speed, service and support, innovation,
distribution network, breadth of product and service offerings and
brand name recognition. GEHC is a leading competitor in this
market.
In the
IT segment, our primary competitors in the healthcare IT VAR
business are Agfa Healthcare, McKesson, Philips, Carestream Health
and other independent software providers. Key competitive factors
are brand recognition, quality, radiology workflow solutions,
scalability and service and support capability. We are able to
capitalize on the brand recognition of GEHC, a leader in healthcare
software solutions. In the managed network services business our
primary competition includes, but is not limited to, organizations
who have a presence in most of the major markets for the following
products and services: network services, managed services, security
services and healthcare applications. Several of those competitors,
many of which are our vendors, are: Verizon, AT&T, CenturyLink,
IBM and Cisco Resellers, Siemens, Epic, small regional IT
integrators and large company internal IT departments.
Though
we believe that we are the industry leader of external
counterpulsation technology, our competitors in the
EECP
®
business are Renew Group Pte. Ltd, and
PSK-Health Sci-Tech Development Co., Ltd., with
which we have partnered to market our EECP
®
products in the international
market.
In the
ambulatory monitoring system business, there are numerous
competitors of various size and strength. The Biox™ series is
among the few from China with CE Mark certification for Europe,
CFDA approval for China, US FDA clearances as well as Brazilian
Agencia Nacional de Vigilancia Sanitaria (ANVISA) approval, which
are among the most important qualifications to market and sell the
products around the world.
Regulations on Medical Devices
As a
medical device manufacturer and marketer, we are subject to
extensive regulation by numerous government regulatory agencies,
including the US FDA and similar foreign agencies. We are required
to comply with applicable laws, regulations and standards governing
the development, preclinical and clinical testing, manufacturing,
quality testing, labeling, promotion, import, export, and
distribution of our medical devices.
Compliance with Regulations in the United States
The
Company has received appropriate US FDA premarket notification
(510(k)) clearance for all its products marketed and sold in the
United States, including all EECP
®
therapy systems
and Biox™ ambulatory monitoring systems and analysis and
report software. We continue to seek US FDA clearance or approval
for new products prior to their introduction to the US
market.
We are
subject to other US FDA regulations that apply prior to and after a
product is commercially released. We also are subject to periodic
and random inspections by the US FDA for compliance with the
current Good Manufacturing Practice, or cGMP, requirements and
Quality System Regulation. The US FDA also enforces post-marketing
controls that include the requirement to submit medical device
reports to the agency when a manufacturer becomes aware of
information suggesting that any adverse events are related to its
marketed products. The FDA relies on medical device reports to
identify product problems and utilizes these reports to determine,
among other things, whether it should exercise its enforcement
powers. The FDA also may require post-market surveillance studies
for specified devices.
We are
subject to the Federal Food, Drug, and Cosmetic Act’s, or
FDCA’s, general controls, including establishment
registration, device listing, and labeling
requirements.
The
sales and advertising of our products is subject to regulation by
the Federal Trade Commission, or FTC. The FTC Act prohibits unfair
or deceptive acts or practices in or affecting commerce. Violations
of the FTC Act, such as failure to have substantiation for product
claims, would subject us to a variety of enforcement actions,
including compulsory process, cease and desist orders and
injunctions, which can require, among other things, limits on
advertising, corrective advertising, consumer redress and
restitution, as well as substantial fines or other
penalties.
As a
medical device sales channel partner and product reseller to
healthcare facilities, we are subject to various federal, state and
local laws targeting fraud and abuse in the healthcare industry,
including anti-kickback and false claims laws.
Foreign Regulation
In most
countries to which we seek to export our medical devices, a local
regulatory clearance must be obtained. The regulatory review
process varies from country to country and can be complex, costly,
uncertain, and time-consuming. Our medical devices, including
EECP
®
systems and Biox™ series products, are all manufactured in
accordance with ISO 13485 (Medical device – Quality
management systems – Requirement for regulatory purpose), an
internationally agreed standard that sets out the requirements for
a quality management system specific to the medical devices
industry. All our current medical devices have obtained necessary
clearances or approvals prior to their release in the appropriate
jurisdictions, including CE marking certification for European
Union countries, China FDA (CFDA) approval for mainland China,
Korean FDA (KFDA) approval for South Korea, Agência Nacional
de Vigilância Sanitária (ANVISA) approval for Brazil,
Taiwan FDA (TFDA) for Taiwan, and the Saudi SFDA (MDMA) for the
Kingdom of Saudi Arabia.
We are
also subject to audits by organizations authorized by foreign
countries to determine compliance with laws, regulations and
standards that apply to the commercialization of our products in
those markets. Examples include auditing by a European Union
Notified Body organization (authorized by a member state’s
Competent Authority) to determine conformity with the Medical
Device Directives (MDD) and by an organization authorized by the
Brazilian government to determine conformity with the ANVISA
requirement.
Patient Privacy
Federal
and state laws protect the confidentiality of certain patient
health information, including patient records, and restrict the use
and disclosure of that protected information. The U.S. Department
of Health and Human Services (HHS) published patient privacy rules
under the Health Insurance Portability and Accountability Act of
1996 (HIPAA privacy rule) and the regulation was finalized in
October 2002. Currently, the HIPAA privacy rule affects us only
indirectly in that patient data that we access, collect and analyze
may include protected health information. Additionally, we have
signed some Business Associate Agreements with Covered Entities
that contractually bind us to protect private health information,
consistent with the HIPAA privacy rule’s requirements. We do
not expect the costs and impact of the HIPAA privacy rule to be
material to our business.
Regulations in the IT Business
As a
reseller of telecommunication services and network solutions
provider, our products and services are subject to federal, state
and local regulations. These regulations govern, in part, our rates
and the way we conduct our business, including the requirement to
offer telecommunications services pursuant to nondiscriminatory
rates, terms, and conditions, the obligation to safeguard the
confidentiality of customer proprietary network
information, as well as the obligation to maintain specialized
records and file reports with the Federal Communications
Commission and state regulatory authorities. While we believe
we are in compliance with laws and regulations in jurisdictions
where we do business, we continue to monitor and assess our
compliance.
The
Federal Communications Commission (“FCC”) exercises
jurisdiction over services and regulates interstate and
international communications in all 50 states, the District of
Columbia and U.S territories. As an independent U.S. government
agency overseen by Congress, the commission is the United States'
primary authority for communications laws, regulation and
technological innovation.
We
maintain Certificates of Public Convenience and Necessity in all 50
states, which enable us to provide services within each state. We
are therefore subject to regulation from the Public Utility
Commissions in each state.
Intellectual Properties
In
addition to other methods of protecting our proprietary technology,
know-how and show-how as well as trade secrets, we pursue a policy
of seeking patent protection, both in the US and abroad, for our
proprietary technologies including those in EECP
®
, Biox™
and MobiCare™ products.
We own
four US utility patents that expire at various times through 2023.
We will from time to time file other patent applications regarding
specific enhancements to the current EECP
®
models, future
generation products, and methods of treatment in the future.
Moreover, trademarks have been registered for the names
“Vaso”, “EECP”, “AngioNew”,
“Natural Bypass”, “Vasomedical”,
“Vasomedical EECP”, “VasoGlobal”,
“VasoSolutions”,
“VasoHealthcare”.
Through
our China-based subsidiaries, we own
sixteen invention and utility patents in China that
expire at various times through 2028, as well as fourteen
software copyright certificates in China related
to proprietary technologies in physiological data acquisition,
analysis and reporting. We also have eight registered
trademarks in China for our products.
Through
our Netwolves subsidiary we hold a patent for Secure and Remote
Monitoring Management (“SRM”) and we hold trademarks
“NetWolves”, “SRM”, and
“Wolfpac”.
There
can be no assurance that our patents will not be violated or that
any issued patents will provide protection that has commercial
significance. As with any patented technology, litigation could be
necessary to protect our patent position. Such litigation can be
costly and time-consuming, and there can be no assurance that we
will be successful.
Employees
As of
December 31, 2018, we employed 317 full-time persons, of which 15
are employed through our facility in Plainview, New York, 88
through VasoHealthcare, 15 through VasoHealthcare IT, 137 through
our Netwolves operations, and 62 in our China operations. None of
our employees are represented by a labor union. We believe that our
employee relations are good.
The
Company also uses several part-time employees and consultants from
time to time for various purposes.
Manufacturing
The
Company conducts manufacturing activities primarily through its
Biox facilities in China, while maintaining certain manufacturing
capability in the Plainview, NY location to satisfy certain
domestic and international needs for the EECP
®
systems. The
Biox facilities manufacture EECP
®
systems,
ambulatory monitoring devices and other medical
devices.
All
manufacturing operations are conducted under the cGMP requirements
as set forth in the FDA Quality System Regulation as well as ISO
13485 (Medical device – Quality management systems –
Requirement for regulatory purpose), an internationally agreed
standard that sets out the requirements for a quality management
system specific to the medical devices industry. We are also
certified to conform to full quality assurance system requirements
of the EU Medical Device Directive (MDD 93/42/EEC Annex II) and can
apply CE marking to all of our current product models. Lastly, we
are certified to comply with the requirements of the Brazilian
Agência Nacional de Vigilância Sanitária (ANVISA).
All these regulations and standards subject us to inspections to
verify compliance and require us to maintain documentation and
controls for the manufacturing and quality activities.
We
believe our manufacturing capacity and warehouse facility are
adequate to meet the current and immediately foreseeable future
demand for the production of our medical devices. We believe our
suppliers of the other medical devices we distribute or represent
are capable of meeting our demand for the foreseeable
future.
You
should carefully consider the risks and uncertainties described
below, together with the information included elsewhere in this
Report on Form 10K. The risks and uncertainties described below are
those we have identified as material, but are not the only risks
and uncertainties facing us. Our business is also subject to
general risks and uncertainties that affect many other companies,
such as market conditions, geopolitical events, changes in laws or
accounting rules, fluctuation in interest rates, terrorism, wars or
conflicts, major health concerns, natural disasters or other
disruptions of expected economic or business conditions. Additional
risks and uncertainties not currently known to us or that we
currently believe are immaterial also may impair our business,
including our results of operations, liquidity and financial
position.
Financial Risks
Ability
to achieve profitability and meet obligations as they come
due
We have
reported a net loss of $3,734,000 for the year ended December 31,
2018 as compared to a net loss of $4,539,000 for the year ended
December 31, 2017. These losses were primarily attributable to
operating losses in our IT segment and lower volume of products
delivered by our partner in our professional sales service segment
since we cannot recognize revenue until the underlying products of
orders we booked are actually delivered to customers.
We maintain lines of credit from a
lending institution which will require further extensions after
their current June 28, 2019 maturity date. These events raise
substantial doubt about our ability to continue as a going concern.
Our ability to continue operating as a going concern is dependent
upon achieving profitability, extending the maturity date of our
existing lines of credit, or through additional debt or equity
financing. Achieving profitability is largely dependent on our
ability to reduce operating costs and to maintain or increase our
current revenue. While we believe we will continue to maintain or
increase our gross revenue and are in the process of reducing
operating costs, and while historically we have received extensions
of the maturity dates of our lines of credit, failure to achieve
these objectives could cast doubt on our ability to continue as a
going concern.
Risks Related to Our Business
We
currently derive a significant amount of our revenue and segment
operating income from our agreement with GEHC.
On May
19, 2010, we signed a sales representation agreement with GEHC.
Under the GEHC Agreement, we have been appointed the exclusive
representative for these products to specific market segments in
the 48 contiguous states of the United States and the District of
Columbia. The GEHC Agreement had an initial term of three years
commencing July 1, 2010 and in 2012 was extended for two additional
years to June 30, 2015. In December 2014, the agreement was
extended again through December 31, 2018. In December 2017, the
agreement was further extended through December 31, 2022, including
the right to terminate without cause with certain
conditions.
A
significant amount of our revenue and segment operating income
arise from activities under this agreement. Moreover, our growth
depends partially on the territories, customer segments and product
modalities assigned to us by GEHC, and thus relies on our ability
to demonstrate our added value as a channel partner, and
maintaining a positive relationship with GEHC. There is no
assurance that the agreement will not be terminated prior to its
expiration pursuant to its termination provisions, or will not
extended beyond the current expiry. Should GEHC terminate the
agreement, it would have a material adverse effect on our financial
condition and results of operations.
We
face competition from other companies and
technologies.
In all
segments of our business we compete with other companies that
market technologies, products and services in the global
marketplace. We do not know whether these companies, or other
potential competitors who may succeed in developing technologies,
products or services that are more efficient or effective than
those offered by us, and that would render our technology and
existing products obsolete or non-competitive. Potential new
competitors may also have substantially greater financial,
manufacturing and marketing resources than those possessed by us.
In addition, other technologies or products may be developed that
have an entirely different approach or means of accomplishing the
intended purpose of our products. Accordingly, the life cycles of
our products are difficult to estimate. To compete successfully, we
must keep pace with technological advancements, respond to evolving
consumer requirements and achieve market acceptance.
We
depend on management and other key personnel.
We are
dependent on a limited number of key management and technical
personnel. The loss of one or more of our key employees may harm
our business if we are unable to identify other individuals to
provide us with similar services. We do not maintain “key
person” insurance on any of our employees. In addition, our
success depends upon our ability to attract and retain additional
highly qualified management, sales, IT, manufacturing and research
and development personnel in our various operations. The
competition for IT personnel is intense.
We
may not continue to receive necessary FDA clearances or approvals,
which could hinder our ability to market and sell certain
products.
If we
modify our medical devices and the modifications significantly
affect safety or effectiveness, or if we make a change to the
intended use, we will be required to submit a new premarket
notification (510(k)) or premarket approval (PMA) application to
the FDA. We would not be able to market the modified device in the
U.S. until the FDA issues a clearance for the 510(k).
If we
offer new products that require 510(k) clearance or a PMA, we will
not be able to commercially distribute those products until we
receive such clearance or approval. Regulatory agency approval or
clearance for a product may not be received or may entail
limitations on the device’s indications for use that could
limit the potential market for the product. Delays in receipt of,
or failure to obtain or maintain, regulatory clearances and
approvals, could delay or prevent our ability to market or
distribute our products. Such delays could have a material adverse
effect on our equipment business.
If
we are unable to comply with applicable governmental
regulation
s
, we may not be
able to continue certain of our operations.
As a
reseller of telecommunication services and network solutions
provider, our products and services are subject to federal, state
and local regulations. These regulations govern, in part, our rates
and the way we conduct our business, including the requirement to
offer telecommunications services pursuant to nondiscriminatory
rates, terms, and conditions, the obligation to safeguard the
confidentiality of customer proprietary network
information, as well as the obligation to maintain specialized
records and file reports with the Federal Communications
Commission and state regulatory authorities. While we believe
we are in compliance with laws and regulations in jurisdictions
where we do business, we must continue to monitor and assess our
compliance.
We also
must comply with current Good Manufacturing Practice requirements
as set forth in the Quality System Regulation to receive US FDA
approval to market new products and to continue to market current
products. Most states also have similar regulatory and enforcement
authority for medical devices.
Our
operations in China are also subject to the laws of the
People’s Republic of China with which we must be in
compliance in order to conduct these operations.
We are
subject to various federal, state and local laws targeting fraud
and abuse in the healthcare industry, including anti-kickback and
false claims laws.
We
cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can we predict what effect
additional governmental regulations or administrative orders,
either domestically or internationally, when and if promulgated,
would have on our business in the future. We may be slow to adapt,
or we may never adapt to changes in existing requirements or
adoption of new requirements or policies. We may incur significant
costs to comply with laws and regulations in the future or
compliance with laws or regulations may create an unsustainable
burden on our business.
We
have foreign operations and are subject to the associated risks of
doing business in foreign countries.
The
Company continues to have operations in China. Operating
internationally involves additional risks relating to such things
as currency exchange rates, different legal and regulatory
environments, political, economic risks relating to the stability
or predictability of foreign governments, differences in the manner
in which different cultures do business, difficulties in staffing
and managing foreign operations, differences in financial
reporting, operating difficulties, and other factors. The
occurrence of any of these risks, if severe enough, could have a
material adverse effect on the consolidated financial position,
results of operations and cash flows of the Company.
Commercial law is
still developing in China and there are limited legal precedents to
follow in commercial transactions. There are many tax jurisdictions
each of which may have changing tax laws. Applicable taxes include
value added taxes (“VAT”), enterprise income tax
(“EIT”), and social (payroll) taxes. Regulations are
often unclear. Tax declarations (reports) are subject to review and
taxing authorities may impose fines, penalties and interest. These
facts create risks for our operations in China.
We
depend on several suppliers for the supply of certain
products.
As a
GEHC channel partner, we could be negatively impacted by
interruptions or delays to equipment installations, production and
quality issues, and any customer concerns related to GEHC. With
respect to our proprietary medical products we now manufacture our
own
products
primarily through our China based facilities, and we depend on
certain independent suppliers for parts, components and certain
finished goods.
We
may not have adequate intellectual property
protection.
Our
patents and proprietary technology may not be able to prevent
competition by others. The validity and breadth of claims in
technology patents involve complex legal and factual questions.
Future patent applications may not be issued, the scope of any
patent protection may not exclude competitors, and our patents may
not provide competitive advantages to us. Our patents may be found
to be invalid and other companies may claim rights in or ownership
of the patents and other proprietary rights held or licensed by us.
Also, our existing patents may not cover products that we develop
in the future. Moreover, when our patents expire, the inventions
will enter the public domain. There can be no assurance that our
patents will not be violated or that any issued patents will
provide protection that has commercial significance. Litigation may
be necessary to protect our patent position. Such litigation may be
costly and time-consuming, and there can be no assurance that we
will be successful in such litigation.
The
loss or violation of certain of our patents and trademarks could
have a material adverse effect upon our business.
Since
patent applications in the United States are maintained in secrecy
until such patent applications are issued, our current product
development may infringe patents that may be issued to others. If
our products were found to infringe patents held by competitors, we
may have to modify our products to avoid infringement, and it is
possible that our modified products would not be commercially
successful.
Risks Related to Our Industries
Our
growth could suffer if the markets into which we sell products
decline, do not grow as anticipated or experience
cyclicality.
Our
growth depends in part on the growth of the IT and healthcare
markets which we serve. In our professional sales services segment,
our quarterly sales and profits depend significantly on the volume
and timing of delivery of the underlying equipment of the orders we
booked during the quarter, and the delivery of such products is
difficult to forecast since it is largely dependent on GEHC.
Product demand is dependent upon the customer’s capital
spending budget as well as government funding policies, and matters
of public policy as well as product and economic cycles that can
affect the spending decisions of these entities. These factors
could adversely affect our growth, financial position, and results
of operations.
Technological
change is difficult to predict and to manage.
We face
the challenges that are typically faced by companies in the IT and
medical device fields. Our products and services may require
substantial development efforts and compliance with governmental
clearance or approval requirements. We may encounter unforeseen
technological or scientific problems that force abandonment or
substantial change in the development of a specific product or
process.
We
are subject to product liability claims and product recalls that
may not be covered by insurance.
The
nature of our manufacturing operations exposes us to risks of
product liability claims and product recalls. Medical devices as
complex as ours frequently experience errors or failures,
especially when first introduced or when new versions are
released.
We
currently maintain product liability insurance at $8,000,000 per
occurrence and $8,000,000 in the aggregate. Our product liability
insurance may not be adequate. In the future, insurance coverage
may not be available on commercially reasonable terms, or at all.
In addition, product liability claims or product recalls could
damage our reputation even if we have adequate insurance
coverage.
We
do not know the effects of healthcare reform
proposals.
The
healthcare industry is undergoing fundamental changes resulting
from political, economic and regulatory influences. In the United
States, the Affordable Care Act (“ACA”) is designed to
provide increased access to healthcare for the uninsured, control
the escalation of healthcare expenditures within the economy and
use healthcare reimbursement policies to balance the federal
budget.
The
United States Congress already has changed the ACA. We expect that
there could be more changes or even a repeal of the ACA. In any
event, we anticipate that there will continue to be a number of
federal and state proposals to constrain expenditures for medical
products and services, which may affect payments for products such
as ours. We cannot predict which, if any of such proposals will be
adopted and when they might be effective, or the effect these
proposals may have on our business. Other countries also are
considering health reform. Significant changes in healthcare
systems could have a substantial impact on the manner in which we
conduct our business and could require us to revise our
strategies.
Risks Related to our Securities
The
application of the "penny stock" rules could adversely affect the
market price of our common stock and increase your transaction
costs to sell those shares.
As long
as the trading price of our common shares is below $5 per share,
the open-market trading of our common shares will be subject to the
"penny stock" rules. The "penny stock" rules impose additional
sales practice requirements on broker-dealers who sell securities
to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of
securities and have received the purchaser's written consent to the
transaction before the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the broker-dealer must
deliver, before the transaction, a disclosure schedule prescribed
by the Securities and Exchange Commission relating to the penny
stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on
broker-dealers restrict the ability and decrease the willingness of
broker-dealers to sell our common shares, which we believe results
in decreased liquidity for our common shares as well as increased
transaction costs for sales and purchases of our common shares as
compared to other securities.
Our
common stock is subject to price volatility.
The
market price of our common stock historically has been and may
continue to be highly volatile. Our stock price could be subject to
wide fluctuations in response to various factors beyond our
control, including, but not limited to:
●
actual or
anticipated fluctuations in our operating results;
●
announcements of
technological innovations, new products or pricing by our
competitors;
●
the timing of
patent and regulatory approvals;
●
the timing and
extent of technological advancements;
●
the sales of our
common stock by affiliates or other shareholders with large
holdings;
●
overall market
fluctuations and domestic and worldwide economic conditions;
and
●
other factors
described in the “Risk Factors” and elsewhere in this
Report.
Our
future operating results may fall below the expectations of
securities industry analysts or investors. Any such shortfall could
result in a significant decline in the market price of our common
stock. In addition, the stock market has experienced significant
price and volume fluctuations that have affected the market price
of the stock of many medical device companies and that often have
been unrelated to the operating performance of such companies.
These broad market fluctuations may directly influence the market
price of our common stock.
We
do not intend to pay dividends in the foreseeable
future.
We do
not intend to pay any cash dividends on our common stock in the
foreseeable future.
Additional Information
We are
subject to the reporting requirements under the Securities Exchange
Act of 1934 and are required to file reports and information with
the Securities and Exchange Commission (SEC), including reports on
the following forms: annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those
reports files or furnished pursuant to Section 13(a) or 15(d) of
the Securities Act of 1934.
The
Company leases its headquarters at an 8,700 square foot facility at
137 Commercial Street, Plainview, New York 11803, under a lease
with a term that expires on September 15, 2022 and with a base
annual rental of approximately $69,000. The Company’s
NetWolves unit leases a 16,200 square foot facility in Tampa,
Florida, under a lease expiring in May 2020 with an annual rental
of approximately $174,000. VHC-IT leases a 3,500 square foot
facility in Nashville, Tennessee pursuant to a one-year lease
expiring April 2019 with an annual rental of $49,000. The Company
is evaluating possible renewal options and believes sufficient
space is available at similar cost in Nashville. We believe that
our current facilities are adequate for foreseeable current and
future needs.
We also
lease approximately 1,500 square feet of office space in New York
City under a lease that expires on May 31, 2020. The annual base
rent for this lease is approximately $58,000.
We
lease our engineering and production facilities in China.
Specifically, we lease approximately 20,400 square feet under
leases expiring in September 2019, August 2020, September 2020, and
December 2020 at an aggregate annual cost of approximately $75,000
in Wuxi, China. Such leases are renewable upon
expiration.
PART II
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock currently trades on the OTC Market under the symbol
VASO. The number of record holders of common stock as of March 31,
2019, was approximately 900, which does not include approximately
8,500 beneficial owners of shares held in the name of brokers or
other nominees. The table below sets forth the range of high and
low trade prices of the common stock for the fiscal periods
specified.
|
|
Year ended December 31, 2018
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
First
quarter
|
$
0.07
|
$
0.05
|
$
0.14
|
$
0.09
|
|
Second
quarter
|
$
0.06
|
$
0.04
|
$
0.11
|
$
0.09
|
|
Third
quarter
|
$
0.05
|
$
0.03
|
$
0.09
|
$
0.07
|
|
Fourth
quarter
|
$
0.05
|
$
0.02
|
$
0.08
|
$
0.05
|
The
last bid price of the Company's common stock on March 29, 2019, was
$0.04 per share.
Dividend Policy
We have
never paid any cash dividends on our common stock and do not intend
to pay cash dividends in the foreseeable future.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains descriptions of our
expectations regarding future trends affecting our business. These
forward looking statements and other forward-looking statements
made elsewhere in this document are made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Please read the section titled “Risk Factors” in
“Item One – Business” to review certain
conditions, among others, which we believe could cause results to
differ materially from those contemplated by the forward-looking
statements.
Except for historical information contained in this report, the
matters discussed are forward-looking statements that involve risks
and uncertainties. When used in this report, words such as
“anticipates”, “believes”,
“could”, “estimates”,
“expects”, “may”, “plans”,
“potential” and “intends” and similar
expressions, as they relate to the Company or its management,
identify forward-looking statements. Such forward-looking
statements are based on the beliefs of the Company’s
management, as well as assumptions made by and information
currently available to the Company’s management. Among the
factors that could cause actual results to differ materially are
the following: the effect of business and economic conditions; the
effect of the dramatic changes taking place in IT and healthcare;
continuation of the GEHC agreements; the impact of competitive
technology and products and their pricing; medical insurance
reimbursement policies; unexpected manufacturing or supplier
problems; unforeseen difficulties and delays in the conduct of
clinical trials and other product development programs; the actions
of regulatory authorities and third-party payers in the United
States and overseas; and the risk factors reported from time to
time in the Company’s SEC reports. The Company undertakes no
obligation to update forward-looking statements as a result of
future events or developments.
The following discussion should be read in conjunction with the
financial statements and notes thereto included in this Annual
Report on Form 10-K.
Overview
Vaso Corporation (formerly Vasomedical,
Inc.)
(“Vaso”)
was
incorporated in Delaware in July 1987.
We principally
operate in three distinct business segments in the healthcare
equipment and information technology industries. We manage and
evaluate our operations, and report our financial results, through
these three business segments.
●
IT segment,
operating through a wholly-owned subsidiary VasoTechnology, Inc.,
primarily focuses on healthcare IT and managed network technology
services;
●
Professional sales
service segment, operating through a wholly-owned subsidiary Vaso
Diagnostics, Inc. d/b/a VasoHealthcare, primarily focuses on the
sale of healthcare capital equipment for General Electric
Healthcare (GEHC) into the health provider middle market;
and
●
Equipment segment,
primarily focuses on the design, manufacture, sale and service of
proprietary medical devices, operating through a wholly-owned
subsidiary VasoMedical, Inc., which in turn operates through
Vasomedical Solutions, Inc. for domestic business and Vasomedical
Global Corp. for international business, respectively.
.
VasoTechnology
VasoTechnology,
Inc.
was formed in May
2015, at the time the Company acquired
all of the assets of NetWolves, LLC and its
affiliates, including the membership interests in NetWolves Network
Services LLC (collectively, “NetWolves”)
, to
address a major issue facing the healthcare IT industry. It
currently consists of a managed network and security service
division (NetWolves) and a healthcare IT application VAR (value
added reseller) division (VasoHealthcare IT). Its current offering
includes:
●
Managed diagnostic
imaging applications (national channel partner of GEHC
IT).
●
Managed network
infrastructure (routers, switches and other core
equipment).
●
Managed network
transport (FCC licensed carrier reselling 175+ facility
partners).
●
Managed security
services (partner with major cybersecurity technologies firms
including IBM and Palo Alto).
VasoTechnology uses
a combination of proprietary technology, methodology and
best-in-class third-party applications to deliver its value
proposition.
VasoHealthcare
VasoHealthcare
commenced operations in 2010, in conjunction with the
Company’s execution of its exclusive sales representation
agreement with GEHC, which is the healthcare business division of
the General Electric Company (“GE”), to further the
sale of certain medical capital equipment in domestic market
segments. Sales of GEHC equipment by the Company have grown
significantly since then.
VasoHealthcare’s
current offering consists of:
●
GEHC diagnostic
imaging capital equipment.
●
GEHC service
agreements for the above equipment.
●
GEHC and third
party financial services for the above equipment.
VasoHealthcare has
built a team of over 80 highly experienced sales professionals who
utilize highly focused sales management and analytic tools to
manage the complete sales process and to increase market
penetration.
VasoMedical
The
proprietary medical equipment business now all under VasoMedical
traces back to 1995 when the Company began the external
counterpulsation technology in the United States. Vasomedical
Global was formed in 2011 to combine and coordinate the various
international operations including design, development,
manufacturing, and sales of medical devices, while domestic
activities are under Vasomedical Solutions. These devices primarily
consist of cardiovascular diagnostic and therapeutic systems. Its
current offering consists of:
●
Biox™ series
Holter monitors and ambulatory blood pressure
recorders.
●
ARCS™ series
analysis, reporting and communication software for physiological
signals such as ECG and blood pressure.
●
MobiCare™
multi-parameter wireless vital-sign monitoring system.
●
EECP
®
therapy
systems, used for non-invasive, outpatient treatment of ischemic
heart disease.
This
segment uses its extensive cardiovascular device knowledge coupled
with its engineering resources to cost effectively create and
market its proprietary technology. It sells and services its
products to domestic customers directly and sells and/or services
its products in the international market mainly through independent
distributors.
Going concern assessment
We have
incurred net losses from operations for the years ended December
31, 2018 and 2017, and we maintain lines of credit from a lending
institution and these lines of credit will require further
extensions after their current June 28, 2019 maturity date. These
events raise substantial doubt about our ability to continue as a
going concern. Our ability to continue operating as a going concern
is dependent upon achieving profitability, extending the maturity
date of our existing lines of credit, or through additional debt or
equity financing. Achieving profitability is largely dependent on
our ability to reduce operating costs and to maintain or increase
our current revenue. While we believe we will continue to maintain
or increase our gross revenue and are in the process of reducing
operating costs, and while historically we have received extensions
of the maturity dates of our lines of credit, failure to achieve
these objectives could cast doubt on our ability to continue as a
going concern.
Strategic Plan and Objectives
Our
short- and long-term plans for the growth of the Company and to
increase stockholder value are:
●
Continue engaging
in effectively reducing operating costs.
●
Continue to expand
our product and service offerings as well as market penetration in
our healthcare IT business and managed network services
business.
●
Build our brand
name in the healthcare provision middle market with the goal of
establishing our technology platform and managed services
methodology as the standard for secure, efficient use of
equipment
and
applications ecosystems.
●
Maintain and
improve business performance in our professional sales service
segment by increasing market penetration of the GE Healthcare
product modalities we represent, and possibly building new teams to
represent other vendors.
●
Maintain and grow
our equipment business by aligning the cost structure with revenue
growth.
●
Continue to seek
accretive partnership and acquisition opportunities.
Results of Operations – For the Years Ended December 31, 2018
and 2017
Total
revenues increased by $1,192,000, or 2%, to $73,980,000 in the year
ended December 31, 2018, from $72,788,000 in the year ended
December 31, 2017. We reported a net loss of $3,734,000 for the
year ended December 31, 2018 as compared to a net loss of
$4,539,000 for the year ended December 31, 2017, a decrease in loss
of $805,000. The decrease in net loss was primarily due to higher
gross profit, the gain on sale of our investment in the VSK joint
venture, and the change from income tax expense to income tax
benefit. Our net loss was $0.02 and $0.03 per basic and diluted
common share for the years ended December 31, 2018 and 2017,
respectively.
Revenues
Revenue
in the IT segment was $44,228,000 for the year ended December 31,
2018 as compared to $42,581,000 for the prior year, an increase of
$1,647,000, or 4%, of which $1,372,000 was attributable to growth
in NetWolves revenues, and $275,000 to growth in VHC-IT revenues.
At December 31, 2018 VHC-IT had an order backlog exceeding $13.5
million.
Commission revenues
in the professional sales service segment decreased by $932,000, or
4%, to $25,511,000 in the year ended December 31, 2018, as compared
to $26,443,000 in the year ended December 31, 2017. The decrease
was primarily due to lower volume of GEHC equipment delivered in
2018, as well as by lower blended commission rates for the
equipment delivered in 2018. As discussed in Note B to the
financial statements, the Company defers recognition of commission
revenue until the underlying equipment is delivered. As of December
31, 2018, the Company recorded on its consolidated balance sheet
for this segment a decrease of $5,028,000, or 23%, in deferred
commission revenue to $17,098,000, of which $7,200,000 is
long-term, compared to $22,126,000 of deferred commission revenue
at December 31, 2017, of which $7,115,000 was long-term. The
decrease in deferred revenue is due principally to lower total
orders booked during the year, partially offset by the decrease in
equipment deliveries over the same period.
Revenue
in our equipment segment increased 13% to $4,241,000 for the year
ended December 31, 2018 from $3,764,000 for the year ended December
31, 2017, as a result of an increase in equipment sales of
$491,000, or 18%, to $3,151,000 for the year ended December 31,
2018, as compared to $2,660,000 for the year ended December 31,
2017, and a decrease in equipment rentals and services revenue of
$14,000, or 1%, to $1,090,000 in the year ended December 31, 2018
from $1,104,000 in the year ended December 31, 2017. The increase
in equipment sales is due primarily to increased deliveries at our
China operations, as well as an 8% increase in sales in our U.S.
operations, resulting from higher software deliveries. The decrease
in revenue generated from equipment rentals and services is due
primarily to lower recognition of service contract
revenues.
As of December
31, 2018, the Company recorded on its consolidated balance sheet
for this segment $988,000 of deferred revenue, of which $503,000 is
long-term, compared to $941,000 of deferred revenue at December 31,
2017, of which $411,000 was long-term, an increase of $47,000 or
5%. The increase in deferred revenue is due principally to a higher
mix of multi-year service contracts sold during the
year.
Gross Profit
The
Company recorded gross profit of $41,124,000, or 56% of revenue,
for the year ended December 31, 2018, compared to $40,731,000, or
56% of revenue, for the year ended December 31, 2017. The increase
of $393,000, or 1%, was due primarily to a $756,000 increase in the
IT segment and a $102,000 increase in the equipment segment
resulting primarily from higher revenues, partially offset by a
$465,000 decrease in the professional sales service
segment.
IT
segment gross profit increased to $18,379,000, or 42% of segment
revenues, for the year ended December 31, 2018 as compared to
$17,623,000, or 41% of segment revenues, in the prior year, an
increase of $756,000, of which $513,000 was attributable to VHC-IT
resulting from both higher revenues and higher gross profit rate,
and $243,000 was attributable to NetWolves, resulting from
increased revenues.
Professional sales
service segment gross profit was $20,165,000, or 79% of the segment
revenues, for the year ended December 31, 2018, a decrease of
$465,000, or 2%, from segment gross profit of $20,630,000, or 78%
of the segment revenue, for the year ended December 31, 2017. The
decrease in gross profit was due primarily to lower recognized
revenue in 2018 as a result of a decrease in equipment delivery
volume and by lower blended commission rates on the equipment
delivered during the year. Cost of commissions decreased by
$467,000, or 8%, to $5,346,000 for the year ended December 31,
2018, as compared to cost of commissions of $5,813,000 in 2017. The
decrease is also due primarily to lower delivery volume. Cost of
commissions reflects commission expense associated with recognized
commission revenues. Commission expense associated with deferred
revenue is recorded as deferred commission expense until the
related commission revenue is earned.
Equipment segment
gross profit increased to $2,580,000, or 61% of equipment segment
revenues, for the year ended December 31, 2018 compared to
$2,478,000, or 66% of equipment segment revenues, for the year
ended December 31, 2017, due to higher sales volume, partially
offset by lower average selling prices. Equipment segment gross
profits are dependent on a number of factors including the mix of
products sold, their respective models and average selling prices,
the ongoing costs of servicing EECP
®
systems, as
well as certain fixed period costs, including facilities, payroll
and insurance.
Operating Loss
Operating loss was
$3,724,000 for the year ended December 31, 2018 compared to
operating loss of $3,832,000 for the year ended December 31, 2017,
a decrease in loss of $108,000. The improvement was primarily
attributable to the decrease in operating loss in the equipment
segment from $1,066,000 in the year ended December 31, 2017 to
$812,000 in the year ended December 31, 2018, due to higher gross
profit and lower operating expenses in the segment. The 2018
professional sales service segment operating income of $1,958,000
was essentially flat as compared to 2017 operating income of
$1,954,000, as reductions in gross profit were largely matched by
reductions in SG&A costs. IT segment operating loss increased
to $3,748,000 for the year ended December 31, 2018 from $3,375,000
for the prior year, an increase of $373,000. The increase was
attributable to a $408,000 higher operating loss at NetWolves
primarily due to increased spending on infrastructure and
engineering efforts, and to higher sales expenses incurred in
building its order backlog for future delivery, partially offset by
a $35,000 lower operating loss at VHC-IT due to higher gross
profit. The healthcare IT VAR business continues to grow as
reflected in the significant increase in order volume and backlog,
which we anticipate to continue to grow and convert to revenue,
resulting in improvement in operating performance.
Selling, general
and administrative (SG&A) expenses for the years ended December
31, 2018 and 2017 were $43,962,000, or 59% of revenues, and
$43,618,000, or 60% of revenues, respectively, reflecting an
increase of $344,000 or less than 1%.
The increase in SG&A expenditures
in the year ended December 31, 2018 resulted primarily from a
$1,336,000 increase in the IT segment due to increased personnel
and bad debt costs, partially offset by a $468,000 decrease in the
professional sales service segment attributable mainly to lower
sales personnel-related cost, and a $300,000 decrease in the
equipment segment, and by $223,000 lower corporate
expenses.
Research and
development (R&D) expenses of $886,000, or 1% of revenues, for
the year ended December 31, 2018 decreased by $59,000, or 6%, from
$945,000, or 1% of revenues, for the year ended December 31, 2017.
The decrease is primarily attributable to lower new product
development costs in the NetWolves operation.
Adjusted EBITDA
We
define Adjusted EBITDA (earnings before interest, taxes,
depreciation and amortization), which is a non-GAAP financial
measure, as net (loss) income, plus net interest expense (income),
tax expense, depreciation and amortization, and non-cash expenses
for share-based compensation. Adjusted EBITDA is a metric
that is used by the investment community for comparative and
valuation purposes. We disclose this metric in order to support and
facilitate the dialogue with research analysts and
investors.
Adjusted EBITDA is
not a measure of financial performance under accounting principles
generally accepted in the United States (“GAAP”) and
should not be considered a substitute for operating income, which
we consider to be the most directly comparable GAAP measure.
Adjusted EBITDA has limitations as an analytical tool, and when
assessing our operating performance, you should not consider
Adjusted EBITDA in isolation, or as a substitute for net income or
other consolidated income statement data prepared in accordance
with GAAP. Other companies may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
A
reconciliation of net loss to Adjusted EBITDA is set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(3,734
)
|
$
(4,539
)
|
|
Interest
expense (income), net
|
727
|
651
|
|
Income
tax (benefit) expense
|
(385
)
|
134
|
|
Depreciation
and amortization
|
2,522
|
2,426
|
|
Share-based
compensation
|
313
|
514
|
|
Adjusted
EBITDA
|
$
(557
)
|
$
(814
)
|
Adjusted EBITDA
increased by $257,000, to $(557,000) in the year ended December 31,
2018 from $(814,000) in the year ended December 31, 2017. The
increase was primarily attributable to the lower net loss,
partially offset by the change from income tax expense to income
tax benefit and by lower share-based compensation as compared to
the prior year.
Other Income (Expense), Net
Other
income (expense), net for the years ended December 31, 2018 and
2017, was $(395,000) and $(573,000), respectively, a decrease in
net expense of $178,000. The decrease was due primarily to the
$212,000 gain on sale of our investment in the VSK joint venture
and $42,000 higher other income, primarily value-added tax refunds
in our China operations, partially offset by $76,000 higher
interest expense on our lines of credit and financed equipment
purchases.
Income Tax (Benefit) Expense
During
the year ended December 31, 2018, we recorded income tax benefit of
$(385,000), as compared to income tax expense of $134,000 in the
year ended December 31, 2017. The Company utilized no net operating
loss carryforwards for the years ended December 31, 2018 and 2017.
The change from income tax expense in 2017 to income tax benefit in
2018 arose primarily from the impact of the change in the
carryforward period for 2018 net operating losses from 20 years to
indefinitely on deferred tax liabilities arising from goodwill
generated by the NetWolves acquisition. The Company has net
operating loss carryforwards of approximately $46 million at
December 31, 2018.
Liquidity and Capital Resources
Cash and Cash Flow – For the year ended December 31,
2018
We have
financed our operations and investment activities primarily from
working capital and additional borrowings. At December 31, 2018, we
had cash and cash equivalents of $2,668,000 and negative working
capital of $16,179,000. $7,797,000 in negative working capital at
December 31, 2018 is attributable to the net balance of deferred
commission expense and deferred revenue. These are non-cash expense
and revenue items and have no impact on future cash flows. At March
31, 2019 the Company’s cash and cash equivalents were
approximately $2.0 million.
Cash
used by operating activities was $1,453,000 during the year ended
December 31, 2018, which consisted of net loss after non-cash
adjustments of $984,000 and cash used by changes in operating
assets and liabilities of $469,000. The changes in the account
balances primarily reflect decreases in deferred revenue and
accrued commissions of $4,981,000 and $599,000, respectively,
partially offset by decreases in accounts and other receivables and
deferred commission expense of $1,725,000 and $1,174,000,
respectively.
Cash
used in investing activities during the year ended December 31,
2018 was $2,586,000 for the purchase of equipment and software,
partially offset by $311,000 in proceeds from the sale of our
investment in the VSK joint venture.
Cash
provided by financing activities during the year ended December 31,
2018 was $1,141,000, primarily attributable to $778,000 in
additional borrowings on our lines of credit, a $21,000 note issued
to purchase equipment, and $500,000 in notes issued to related
parties, partially offset by $156,000 in note and capital lease
payments.
Liquidity
We have
incurred net losses from operations for the years ended December
31, 2018 and 2017, and we maintain lines of credit from a lending
institution which will require further extensions after their
current June 28, 2019 maturity date. These events raise substantial
doubt about our ability to continue as a going concern. Our ability
to continue operating as a going concern is dependent upon
achieving profitability, extending the maturity date of our
existing lines of credit, or through additional debt or equity
financing. Achieving profitability is largely dependent on our
ability to reduce operating costs and to maintain or increase our
current revenue. While we believe we will continue to maintain or
increase our gross revenue and are in the process of reducing
costs, and while historically we have received extensions of the
maturity dates of our lines of credit, failure to achieve these
objectives could cast doubt on our ability to continue as a going
concern.
Off-Balance Sheet Arrangements
We do
not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities
(SPES), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of December 31, 2018, we are not
involved in any unconsolidated SPES or other off-balance sheet
arrangements.
Effects of Inflation
We
believe that inflation and changing prices over the past two years
have not had a significant impact on our revenue or on our results
of operations.
Critical Accounting Policies and Estimates
Note B
of the Notes to Consolidated Financial Statements includes a
summary of our significant accounting policies and methods used in
the preparation of our financial statements. In preparing these
financial statements, we have made our best estimates and judgments
of certain amounts included in the financial statements, giving due
consideration to materiality. The application of these accounting
policies involves the exercise of judgment and use of assumptions
as to future uncertainties and, as a result, actual results could
differ from these estimates. Our critical accounting policies and
estimates are as follows:
Revenue Recognition
In the
first quarter of 2018, we adopted Accounting Standards Update
("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606).
ASU 2014-09, as amended, replaced most existing revenue recognition
guidance in U.S. GAAP.
This
new guidance requires certain judgments and estimates in
implementing its five-step process to be followed in determining
the amount and timing of revenue recognition and related
disclosures. Refer to Note B of the notes to consolidated financial
statements for further discussion regarding significant judgments
involved in our application of ASC 606.
Inventories, net
We
value inventories in the equipment segment at the lower of cost or
net realizable value, with cost being determined on a first-in,
first-out basis. The Company occasionally places EECP
®
systems and
other medical device products at various field locations for
demonstration, training, evaluation, and other similar purposes at
no charge. The cost of these EECP
®
systems and
other products is transferred to property and equipment and is
amortized over the next two to five years. The Company records the
cost of refurbished components of EECP
®
systems and
critical components at cost plus the cost of refurbishment. The
Company regularly reviews inventory quantities on hand,
particularly raw materials and components, and records a provision
for excess and slow moving inventory based primarily on existing
and anticipated design and engineering changes to its products as
well as forecasts of future product demand.
In our
IT Segment, we purchase computer hardware and software for specific
customer requirements and value such inventories at the lower of
cost or estimated market, with cost being determined on the
specific identification method.
Goodwill and Intangible Assets
Goodwill represents the excess of
cost over the fair value of net assets of businesses acquired. The
Company accounts for goodwill under the guidance of the ASC Topic
350, “Intangibles: Goodwill and Other”. Goodwill
acquired in a purchase business combination and determined to have
an indefinite useful life is not amortized, but instead tested for
impairment, at least annually, in accordance with this
guidance.
The recoverability of goodwill is subject to an
annual impairment test or whenever an event occurs or circumstances
change that would more likely than not result in an impairment. The
impairment test is based on the estimated fair value of the
underlying businesses and performed in the fourth quarter of each
year.
I
ntangible assets consist of the value of customer
contracts and relationships, patent and technology costs, and
software. The cost of significant customer-related intangibles is
amortized in proportion to estimated total related revenue; cost of
other intangible assets is generally amortized on a straight-line
basis over the asset's estimated economic life, which range
from five to ten years. T
he Company
capitalizes internal use software costs incurred during the
application development stage. Costs related to preliminary project
activities and post implementation activities are expensed as
incurred.
Deferred Revenues
For the
professional sales service segment, amounts billable under the
agreement with GE Healthcare in advance of customer acceptance of
the equipment are recorded initially as deferred revenue, and
commission revenue is subsequently recognized as customer
acceptance of such equipment is reported to us by
GEHC.
For the
equipment segment, we record revenue on extended service contracts
ratably over the term of the related contract period. In accordance
with the provisions of ASC Topic 606, we defer revenue related to
EECP
®
system sales for the fair value of installation and in-service
training to the period when the services are rendered and for
warranty obligations ratably over the service period, which is
generally one year.
Income Taxes
Deferred income
taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss
carry forwards for which income tax benefits are expected to be
realized in future years. A valuation allowance is established,
when necessary, to reduce deferred tax assets to the amount
expected to be realized. In estimating future tax consequences, we
generally consider all expected future events other than an
enactment of changes in the tax laws or rates. Deferred tax assets
are continually evaluated for realizability. To the extent our
judgment regarding the realization of the deferred tax assets
changes, an adjustment to the allowance is recorded, with an
offsetting increase or decrease, as appropriate, in income tax
expense. Such adjustments are recorded in the period in which our
estimate as to the realizability of the assets changed that it is
“more likely than not” that all of the deferred tax
assets will be realized. The “more likely than not”
standard is subjective and is based upon our estimate of a greater
than 50% probability that the deferred tax asset will be
realized.
We also
comply with the provisions of the ASC Topic 740, “Income
Taxes”, which prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax
return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. Based on its analysis, the Company has determined that
it has not incurred any liability for unrecognized tax benefits as
of December 31, 2018 and December 31, 2017. The Company recognizes
accrued interest and penalties related to unrecognized tax benefits
as income tax expense. No amounts were accrued for the payment of
interest and penalties at December 31, 2018 and December 31, 2017.
Management is currently unaware of any issues under review that
could result in significant payments, accruals or material
deviations from its position.
Recently Issued Accounting Pronouncements
Note B
of the Notes to Consolidated Financial Statements includes a
description of the Company’s evaluation of recently issued
accounting pronouncements.
I
TEM 8 - FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The
consolidated financial statements listed in the accompanying Index
to Consolidated Financial Statements are filed as part of this
report.
I
TEM 9A - CONTROLS AND PROCEDURES
Report on Disclosure Controls and Procedures
Disclosure controls
and procedures reporting as promulgated under the Exchange Act is
defined as controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports that we
file or submit under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in the
SEC rules and forms. Disclosure controls and procedures include
without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer
(“CFO”), or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
Our CEO and our CFO have evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2018 and have
concluded
that the Company’s disclosure controls and
procedures were effective as of December 31, 2018.
Management’s Report on Internal Control over Financial
Reporting
Management is
responsible for establishing and maintaining adequate internal
control over financial reporting for the Company as defined in Rule
13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal
control involves maintaining records that accurately represent our
business transactions, providing reasonable assurance that receipts
and expenditures of company assets are made in accordance with
management authorization, and providing reasonable assurance that
unauthorized acquisition, use or disposition of company assets that
could have a material effect on our financial statements would be
detected or prevented on a timely basis.
Because
of its innate limitations, internal control over our financial
statements is not intended to provide absolute guarantee that a
misstatement can be detected or prevented on the statements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation. Also projections of any
evaluation of effectiveness to future periods are subject to risk
that controls may become inadequate because of changes in
condition, or that the degree of compliance with the policies or
procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal
Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 COSO
framework). A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the Company’s annual or interim financial statements will
not be prevented or detected on a timely basis.
Based
on this evaluation and those criteria, the Company’s CEO and
CFO concluded that the Company’s internal control over
financial reporting was effective as of December 31,
2018.
This
report does not include an attestation report of the
Company’s Independent Registered Public Accounting Firm
regarding internal control over financial reporting.
Management’s report was not subject to attestation by the
Company’s Independent Registered Public Accounting Firm
pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only
Management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
For the
quarter ended December 31, 2018 there were no changes in our
internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
I
TEM 9B – OTHER INFORMATION
The
Company held its annual meeting of stockholders on November 16,
2018. At the meeting, the Company’s shareholders voted to
approve the following proposals:
(1)
The election of two
directors in Class I – Joshua Markowitz and Edgar Rios - to
hold office until the 2021 Annual Meeting of Stockholders;
and,
(2)
The appointment of
Marcum LLP as our independent registered public accountants for the
year ending December 31, 2018.
The
following table presents the voting results on these
proposals:
|
Approved
Proposals
|
|
|
|
|
|
|
|
|
Election of
Directors
|
|
|
|
|
|
Joshua
Markowitz
|
84,816,356
|
10,892,995
|
-
|
-
|
|
Edgar
Rios
|
85,085,870
|
10,623,481
|
-
|
-
|
|
|
|
|
|
|
|
Appointment of
public accountants
|
125,903,793
|
-
|
18,634,570
|
77,882
|
V
aso Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
2,668
|
$
5,245
|
|
Accounts
and other receivables, net of an allowance for
doubtful
|
|
|
|
accounts
and commission adjustments of $3,994 at December 31,
|
|
|
|
2018
and $4,872 at December 31, 2017
|
11,028
|
13,225
|
|
Receivables
due from related parties
|
20
|
20
|
|
Inventories,
net
|
1,983
|
2,355
|
|
Deferred
commission expense
|
2,585
|
3,649
|
|
Prepaid
expenses and other current assets
|
890
|
993
|
|
Total
current assets
|
19,174
|
25,487
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net of accumulated depreciation of
|
|
|
|
$6,370
at December 31, 2018 and $4,980 at December 31,
2017
|
5,809
|
4,719
|
|
GOODWILL
|
17,309
|
17,471
|
|
INTANGIBLES,
net
|
4,740
|
5,254
|
|
|
3,067
|
3,847
|
|
DEFERRED TAX
ASSETS, net
|
375
|
-
|
|
|
$
50,474
|
$
56,778
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Accounts
payable
|
$
6,284
|
$
5,423
|
|
Accrued
commissions
|
2,116
|
2,467
|
|
Accrued
expenses and other liabilities
|
5,655
|
5,337
|
|
Sales
tax payable
|
1,020
|
787
|
|
Deferred
revenue - current portion
|
10,382
|
15,540
|
|
Notes
payable and capital lease obligations - current
portion
|
9,304
|
3,674
|
|
Notes
payable - related parties - current portion
|
582
|
86
|
|
Due
to related party
|
10
|
390
|
|
Total
current liabilities
|
35,353
|
33,704
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
Notes
payable and capital lease obligations, net of current
portion
|
400
|
4,834
|
|
Notes
payable - related parties, net of current portion
|
245
|
259
|
|
Deferred
revenue, net of current portion
|
7,704
|
7,526
|
|
Deferred
tax liability
|
124
|
220
|
|
Other
long-term liabilities
|
1,037
|
1,083
|
|
Total
long-term liabilities
|
9,510
|
13,922
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (NOTE P)
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
Preferred
stock, $.01 par value; 1,000,000 shares authorized; nil
shares
|
|
|
|
issued
and outstanding at December 31, 2018 and 2017
|
-
|
-
|
|
Common
stock, $.001 par value; 250,000,000 shares authorized;
|
|
|
|
177,417,287
and 175,741,970 shares issued at December 31, 2018
|
|
|
|
and
2017, respectively; 167,109,200 and 165,433,883 shares
|
|
|
|
outstanding
at December 31, 2018 and 2017, respectively
|
178
|
176
|
|
Additional
paid-in capital
|
63,672
|
63,363
|
|
Accumulated
deficit
|
(55,924
)
|
(52,329
)
|
|
Accumulated
other comprehensive loss
|
(315
)
|
(58
)
|
|
Treasury
stock, at cost, 10,308,087 shares at December 31, 2018 and
2017
|
(2,000
)
|
(2,000
)
|
|
Total
stockholders’ equity
|
5,611
|
9,152
|
|
|
$
50,474
|
$
56,778
|
See Note B for Variable Interest Entity disclosures
The accompanying notes are an integral part of these consolidated
financial statements.
V
aso Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Managed
IT systems and services
|
$
44,228
|
$
42,581
|
|
Professional
sales services
|
25,511
|
26,443
|
|
Equipment
sales and services
|
4,241
|
3,764
|
|
Total
revenues
|
73,980
|
72,788
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
Cost
of managed IT systems and services
|
25,849
|
24,958
|
|
Cost
of professional sales services
|
5,346
|
5,813
|
|
Cost
of equipment sales and services
|
1,661
|
1,286
|
|
Total
cost of revenues
|
32,856
|
32,057
|
|
Gross
profit
|
41,124
|
40,731
|
|
|
|
|
|
Operating
expenses
|
|
|
|
Selling,
general and administrative
|
43,962
|
43,618
|
|
Research
and development
|
886
|
945
|
|
Total
operating expenses
|
44,848
|
44,563
|
|
Operating
loss
|
(3,724
)
|
(3,832
)
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
Interest
and financing costs
|
(750
)
|
(674
)
|
|
Interest
and other income, net
|
143
|
101
|
|
Gain
on sale of investment in VSK
|
212
|
-
|
|
Total
other expense, net
|
(395
)
|
(573
)
|
|
|
|
|
|
Loss
before income taxes
|
(4,119
)
|
(4,405
)
|
|
Income
tax benefit (expense)
|
385
|
(134
)
|
|
Net
loss
|
(3,734
)
|
(4,539
)
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
Foreign
currency translation (loss) gain
|
(257
)
|
271
|
|
Comprehensive
loss
|
$
(3,991
)
|
$
(4,268
)
|
|
|
|
|
|
Loss
per common share
|
|
|
|
-
basic and diluted
|
$
(0.02
)
|
$
(0.03
)
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
-
basic and diluted
|
165,420
|
162,213
|
The accompanying notes are an integral part of these consolidated
financial statements.
V
aso Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2017
|
173,812
|
$
174
|
(10,308
)
|
$
(2,000
)
|
$
62,856
|
$
(47,790
)
|
$
(329
)
|
$
12,911
|
|
Share-based
compensation
|
1,930
|
2
|
-
|
-
|
512
|
-
|
-
|
514
|
|
Shares
not issued for employee tax liability
|
-
|
-
|
-
|
-
|
(5
)
|
-
|
-
|
(5
)
|
|
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
271
|
271
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(4,539
)
|
-
|
(4,539
)
|
|
Balance
at December 31, 2017
|
175,742
|
$
176
|
(10,308
)
|
$
(2,000
)
|
$
63,363
|
$
(52,329
)
|
$
(58
)
|
$
9,152
|
|
Share-based
compensation
|
1,675
|
2
|
-
|
-
|
311
|
-
|
-
|
313
|
|
Adoption
of new accounting standard (*)
|
-
|
-
|
-
|
-
|
-
|
139
|
-
|
139
|
|
Shares
not issued for employee tax liability
|
-
|
-
|
-
|
-
|
(2
)
|
-
|
-
|
(2
)
|
|
Foreign
currency translation loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(257
)
|
(257
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,734
)
|
-
|
(3,734
)
|
|
Balance
at December 31, 2018
|
177,417
|
$
178
|
(10,308
)
|
$
(2,000
)
|
$
63,672
|
$
(55,924
)
|
$
(315
)
|
$
5,611
|
(*)
Accounting Standards Codification Topic 606, Revenue from Contracts
with Customers.
The accompanying notes are an integral part of these consolidated
financial statements.
V
aso Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
Net
loss
|
$
(3,734
)
|
$
(4,539
)
|
|
Adjustments
to reconcile net loss to net
|
|
|
|
cash
(used in) provided by operating activities
|
|
|
|
Depreciation
and amortization
|
2,522
|
2,426
|
|
Deferred
income taxes
|
(374
)
|
216
|
|
Loss
from interest in joint venture
|
9
|
20
|
|
Gain
on sale of investment in VSK
|
(212
)
|
-
|
|
Loss
on disposal of property and equipment
|
-
|
3
|
|
Provision
for doubtful accounts and commission adjustments
|
460
|
271
|
|
Amortization
of debt issue costs
|
32
|
33
|
|
Share-based
compensation
|
313
|
514
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
and other receivables
|
1,725
|
(737
)
|
|
Receivables
due from related parties
|
-
|
(25
)
|
|
Inventories,
net
|
329
|
87
|
|
Deferred
commission expense
|
1,174
|
(1,732
)
|
|
Prepaid
expenses and other current assets
|
98
|
(66
)
|
|
Other
assets, net
|
223
|
1,036
|
|
Accounts
payable
|
864
|
197
|
|
Accrued
commissions
|
(599
)
|
296
|
|
Accrued
expenses and other liabilities
|
602
|
27
|
|
Sales
tax payable
|
239
|
67
|
|
Deferred
revenue
|
(4,981
)
|
3,663
|
|
Deferred
tax liability
|
(97
)
|
108
|
|
Other
long-term liabilities
|
(46
)
|
(266
)
|
|
Net
cash (used in) provided by operating activities
|
(1,453
)
|
1,599
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
Purchases
of equipment and software
|
(2,586
)
|
(2,374
)
|
|
Proceeds
from sale of investment in VSK
|
311
|
-
|
|
Net
cash used in investing activities
|
(2,275
)
|
(2,374
)
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
Net
borrowings (repayments) on revolving line of credit
|
778
|
(384
)
|
|
Payroll
taxes paid by withholding shares
|
(2
)
|
(5
)
|
|
Proceeds
from note payable
|
21
|
-
|
|
Repayment
of notes payable and capital lease obligations
|
(156
)
|
(328
)
|
|
Proceeds
from (payments on) notes payable - related parties
|
500
|
(335
)
|
|
Net
cash provided by (used in) financing activities
|
1,141
|
(1,052
)
|
|
Effect
of exchange rate differences on cash and cash
equivalents
|
10
|
(15
)
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(2,577
)
|
(1,842
)
|
|
Cash
and cash equivalents - beginning of year
|
5,245
|
7,087
|
|
Cash
and cash equivalents - end of year
|
$
2,668
|
$
5,245
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION
|
|
|
|
Interest
paid
|
$
701
|
$
639
|
|
Income
taxes paid
|
$
79
|
$
58
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
Equipment
acquired through capital lease
|
$
529
|
$
-
|
The accompanying notes are an integral part of these consolidated
financial statements.
ES
TO CONSOLIDATED FINANCIAL STATEMENTS
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
N
OTE A – DESCRIPTION OF BUSINESS AND GOING
CONCERN ASSESSMENT
Vaso Corporation was incorporated in Delaware in
July 1987.
For most of its history, the Company was a
single-product company designing, manufacturing, marketing and
servicing its proprietary Enhanced External Counterpulsaion, or
EECP
®
,
therapy systems, mainly for the treatment of angina. In 2010 it
began to diversify its business operations. The Company changed its
name to Vaso Corporation in 2016 to more accurately reflect the
diversified nature of its business mixture, and continues to use
the original name VasoMedical for its proprietary medical device
subsidiary.
Unless the context
requires otherwise, all references to “we”,
“our”, “us”, “Company”,
“registrant”, “Vaso” or
“management” refer to Vaso Corporation and its
subsidiaries.
Overview
Vaso
Corporation principally operates in three distinct business
segments in the healthcare equipment and information technology
industries. We manage and evaluate our operations, and report our
financial results, through these three business
segments.
●
IT segment,
operating through a wholly-owned subsidiary VasoTechnology, Inc.,
primarily focuses on healthcare IT and managed network technology
services;
●
Professional sales
service segment, operating through a wholly-owned subsidiary Vaso
Diagnostics, Inc. d/b/a VasoHealthcare, primarily focuses on the
sale of healthcare capital equipment for General Electric
Healthcare (“GEHC”) into the health provider middle
market; and
●
Equipment segment,
primarily focuses on the design, manufacture, sale and service of
proprietary medical devices, operating through a wholly-owned
subsidiary VasoMedical, Inc., which in turn operates through
Vasomedical Solutions, Inc. for domestic business and Vasomedical
Global Corp. for international business, respectively.
VasoTechnology
VasoTechnology,
Inc.
was formed in May
2015, at the time the Company acquired
all of the assets of NetWolves, LLC and its
affiliates, including the membership interests in NetWolves Network
Services, LLC (collectively, “NetWolves”)
. It
currently consists of a managed network and security service
division, NetWolves, and a healthcare IT application VAR (value
added reseller) division, VasoHealthcare IT.
In June
2014, the Company began its IT segment business by executing the
Value Added Reseller Agreement (“VAR Agreement”) with
GEHC
to become a national value added
reseller of GEHC Digital’s software solutions such as Picture
Archiving and Communication System (“PACS”), Radiology
Information System (“RIS”), and related services,
including implementation, training, management and support. This
multiyear VAR Agreement focuses primarily on existing customer
segments currently served by VasoHealthcare on behalf of GEHC. A
new wholly owned subsidiary, VasoHealthcare IT Corp. (“VHC
IT”), was formed to conduct the healthcare IT
business.
In
May 2015, the Company further expanded its IT segment business by
acquiring NetWolves. NetWolves designs and delivers multi-network
and multi-technology solutions as a managed network provider, and
provides a complete single-source solution that includes design,
network redundancy, application device management, real-time
network monitoring, reporting and support systems as a
comprehensive solution.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
VasoHealthcare
In May
2010, the Company launched its Professional Sales Service business
through a wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a
VasoHealthcare, which was appointed the exclusive representative
for the sale of select GEHC diagnostic imaging equipment to
specific market segments in the 48 contiguous states of the United
States and the District of Columbia. The original agreement
(“GEHC Agreement”) has been extended several times and
currently expires
December 31, 2022,
subject to earlier termination under certain
circumstances
.
VasoMedical
The
proprietary medical equipment business now all under VasoMedical
traces back to 1995 when the Company began the external
counterpulsation technology in the United States. Vasomedical
Global was formed in 2011 to combine and coordinate the various
international operations including design, development,
manufacturing, and sales of medical devices, while domestic
activities are under Vasomedical Solutions.
The
Company’s Equipment business also has been significantly
expanded from the original EECP
®
-only
operations. In September 2011, the Company acquired FGE, a British
Virgin Islands company, which owns or controls two Chinese
operating companies - Life Enhancement Technology Ltd.
(“LET”) based in Foshan, China, and Biox Instruments
Co. Ltd. (“Biox”) based in Wuxi, China, respectively -
to expand its technical and manufacturing capabilities and to
enhance its distribution network, technology, and product
portfolio. Biox is a variable interest entity (“VIE”)
controlled by FGE through certain contracts and an option to
acquire all the shares of Biox.
In
August 2014, the Company acquired all of the outstanding shares of
Genwell Instruments Co. Ltd. (“Genwell”), located in
Wuxi, China. Genwell was formed in China in 2010 with the
assistance of a government grant to develop the MobiCare™
wireless multi-parameter patient monitoring system and holds
intellectual property rights for this system.
As a result,
the Company has now expanded its equipment products portfolio to
include Biox™ series ambulatory patient monitoring systems,
ARCS™ series software for ECG and blood pressure analysis,
and the MobiCare™ patient monitoring device. In 2017, as an
effort to further reduce engineering and production cost of its
EECP
®
products, the Company moved the operations of LET from Foshan,
China to Biox in Wuxi, China, and closed LET in 2018.
In
April 2014, the Company entered into a cooperation agreement with
Chongqing PSK-Health Sci-Tech Development Co., Ltd.
(“PSK”) of Chongqing, China, the leading manufacturer
of external counter pulsation, or ECP, therapy systems in China, to
form a joint venture company, VSK Medical Limited
(“VSK”), a Cayman Islands company, for the global
marketing, sale and advancement of ECP therapy technology. The
Company owned 49.9% of VSK, which commenced operations in January
2015. In March 2018, the Company terminated the cooperation
agreement with PSK and sold its shares in VSK to PSK (see Note
K).
Going concern assessment
We have
incurred net losses from operations for the years ended December
31, 2018 and 2017, and we maintain lines of credit from a lending
institution and these lines of credit will require further
extensions after their current June 28, 2019 maturity date. These
events raise substantial doubt about our ability to continue as a
going concern. Our ability to continue operating as a going concern
is dependent upon achieving profitability, extending the maturity
date of our existing lines of credit, or through additional debt or
equity financing. Achieving profitability is largely dependent on
our ability to reduce operating costs and to maintain or increase
our current revenue. While we believe we will continue to maintain
or increase our gross revenue and are in the process of reducing
operating costs, and while historically we have received extensions
of the maturity dates of our lines of credit, failure to achieve
these objectives could cast doubt on our ability to continue as a
going concern.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
NOTE B
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A
summary of the significant accounting policies consistently applied
in the preparation of the consolidated financial statements are as
follows:
Principles of Consolidation
The
consolidated financial statements include the accounts of Vaso
Corporation, its wholly-owned subsidiaries, and the variable
interest entity where the Company is the primary beneficiary.
Significant intercompany balances and transactions have been
eliminated.
Variable Interest Entity
Basic Information
The
Company follows the guidance of accounting for variable interest
entities, which requires certain variable interest entities to be
consolidated by the primary beneficiary of the
entities.
Biox is
a Variable Interest Entity (“VIE”). Laws and
regulations of the Peoples Republic of China (“PRC”)
prohibit or restrict companies with foreign ownership from certain
activities and benefits including eligibility for certain
government grants and certain rebates related to commercial
activities. To provide the Company the expected residual returns of
the VIE, the Company, through its wholly-owned subsidiary Gentone,
entered into a series of contractual arrangements with Biox and its
registered shareholders to enable the Company, to:
●
exercise effective
control over the VIE;
●
receive
substantially all of the economic benefits and residual returns,
and absorb substantially all the risks of the VIE as if they were
their sole shareholders; and
●
have an exclusive
option to purchase all of the equity interests in the
VIE.
The
Company’s management evaluated the relationships between the
Company and Biox, and the economic benefits flow of the applicable
contractual arrangements. The Company concluded that it is the
primary beneficiary of Biox. As a result, the results of
operations, assets and liabilities of Biox have been included in
the Company’s consolidated financial statements.
The
significant agreements through which the Company exercises
effective control over Biox are:
●
the Exclusive
Technical Consulting Services Agreement between Biox and
Gentone;
●
the Option
Agreement on Purchase of the Equity Interest executed by and among
the shareholders of Biox and Gentone;
●
the Equity Pledge
Agreement executed by and among the shareholders of Biox and
Gentone; and
●
the Powers of
Attorney issued by the shareholders of Biox.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Financial Information of VIE
Liabilities
recognized as a result of consolidating this VIE do not represent
additional claims on the Company’s general assets. VIE assets
can be used to settle obligations of the primary beneficiary. The
financial information of Biox, which was included in the
accompanying consolidated financial statements, is presented as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
97
|
$
41
|
|
Total
assets
|
$
1,641
|
$
1,599
|
|
Total
liabilities
|
$
1,662
|
$
1,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net revenue
|
$
2,294
|
$
1,597
|
|
|
|
|
|
Net
income (loss)
|
$
111
|
$
(524
)
|
Use of Estimates
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes.
Significant estimates and assumptions relate to estimates of
collectibility of accounts receivable, the realizability of
deferred tax assets, stock-based compensation, values and lives
assigned to acquired intangible assets, fair value of reporting
units in connection with goodwill impairment test, the adequacy of
inventory reserves, variable consideration, and allocation of
contract transaction price to performance obligations. Actual
results could differ from those estimates.
Revenue Recognition
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers (Topic 606). Under the standard, revenue is recognized
when a customer obtains control of promised goods or services in an
amount that reflects the consideration the entity expects to
receive in exchange for those goods or services. ASU 2014-09
replaced most existing revenue recognition guidance in U.S. GAAP.
The new standard introduces a five-step process to be followed in
determining the amount and timing of revenue recognition. It also
provides guidance on accounting for costs incurred to obtain or
fulfill contracts with customers, and establishes disclosure
requirements which are more extensive than those required under
prior U.S. GAAP. Generally, we recognize revenue under Topic 606
for each of our performance obligations either over time
(generally, the transfer of a service) or at a point in time
(generally, the transfer of a good) as follows:
Revenue
relating to recurring managed network and voice services provided
by NetWolves are recognized as provided on a monthly basis
(“over time”). Non-recurring charges related to the
provision of such services are recognized in the period provided
(“point in time”). In the IT VAR business, software
system installations are recognized upon verification of
installation and expiration of an acceptance period (“point
in time”). Monthly post-implementation customer support
provided under such installations as well as software solutions
offered under a monthly Software as a Service (“SaaS”)
fee basis are recognized monthly over the contract term
(“over time”).
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Commission revenue
is recognized when the underlying equipment has been delivered by
GEHC and accepted at the customer site in accordance with the terms
of the specific sales agreement (“point in
time”).
In the
United States, we recognized revenue from the sale of our medical
equipment in the period in which we deliver the product to the
customer (“point in time”). Revenue from the sale of
our medical equipment to international markets is recognized upon
shipment of the product to a common carrier, as are supplies,
accessories and spare parts delivered in both domestic and
international markets (“point in time”). The Company
also recognizes revenue from the maintenance of EECP® systems
either on a time and material as-billed basis (“point in
time”) or through the sale of a service contract, where
revenue is recognized ratably over the contract term (“over
time”).
Impact of Adoption
Effective January
1, 2018, the Company adopted the requirements of Topic 606 using
the modified retrospective method, which provided that the
cumulative effect from prior periods upon applying the new guidance
was recognized in our consolidated balance sheets as of the date of
adoption, including an adjustment to retained earnings, and that
prior periods are not retrospectively adjusted. The Company elected
to apply the modified retrospective method only to contracts that
were not completed at January 1, 2018. A summary and discussion of
such cumulative effect adjustment and the impact on current period
financial statements of adopting Topic 606 is as
follows:
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
STATEMENT
OF OPERATIONS
|
|
|
|
|
Revenues
|
|
|
|
|
Professional
sales services
|
$
25,511
|
$
-
|
$
25,511
|
|
Total
revenues
|
73,980
|
-
|
73,980
|
|
|
|
|
|
|
Gross
Profit
|
41,124
|
-
|
41,124
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
Selling,
general and administrative
|
44,083
|
(121
)
|
43,962
|
|
Operating
loss
|
$
(3,845
)
|
$
121
|
$
(3,724
)
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Accounts
and other receivables, net
|
$
11,028
|
$
-
|
$
11,028
|
|
Deferred
commission expense
|
$
2,577
|
$
8
|
$
2,585
|
|
Other
assets, net
|
$
3,252
|
$
190
|
$
3,442
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Deferred
revenue - current portion
|
$
10,382
|
$
-
|
$
10,382
|
|
Deferred
revenue - long term
|
$
7,704
|
$
-
|
$
7,704
|
|
Accumulated
deficit
|
$
(56,185
)
|
$
261
|
$
(55,924
)
|
Disaggregation of Revenue
The
following tables present revenues disaggregated by our business
operations and timing of revenue recognition:
|
|
Year ended December 31, 2018
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
services
|
$
40,254
|
|
|
$
40,254
|
$
38,882
|
|
|
$
38,882
|
|
Software
sales and support
|
3,974
|
|
|
3,974
|
3,699
|
|
|
3,699
|
|
Commissions
|
|
25,511
|
|
25,511
|
|
26,443
|
|
26,443
|
|
Medical
equipment sales
|
|
|
3,151
|
3,151
|
|
|
2,660
|
2,660
|
|
Medical
equipment service
|
|
|
1,090
|
1,090
|
|
|
1,104
|
1,104
|
|
|
$
44,228
|
$
25,511
|
$
4,241
|
$
73,980
|
$
42,581
|
$
26,443
|
$
3,764
|
$
72,788
|
|
|
Year ended December 31, 2018
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
recognized over time
|
$
39,340
|
$
-
|
$
658
|
$
39,998
|
$
37,629
|
$
-
|
$
707
|
$
38,336
|
|
Revenue
recognized at a point in time
|
4,888
|
25,511
|
3,583
|
33,982
|
4,952
|
26,443
|
3,057
|
34,452
|
|
|
$
44,228
|
$
25,511
|
$
4,241
|
$
73,980
|
$
42,581
|
$
26,443
|
$
3,764
|
$
72,788
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Transaction Price Allocated to Remaining Performance
Obligations
As of
December 31, 2018, the aggregate amount of transaction price
allocated to performance obligations that are unsatisfied (or
partially unsatisfied) for executed contracts approximates $82.2
million, of which we expect to recognize revenue as
follows:
|
|
Fiscal years of revenue recognition
|
|
|
|
|
|
|
|
Unfulfilled
performance obligations
|
$
41,271
|
$
26,087
|
$
8,595
|
$
6,278
|
Contract Liabilities
Contract
liabilities arise in our IT VAR, VasoHealthcare, and VasoMedical
businesses. In our IT VAR business, payment arrangements with
clients typically include an initial payment due upon contract
signing and milestone-based payments based upon product delivery
and go-live, as well as post go-live monthly payments for
subscription and support fees. Customer payments received, or
receivables recorded, in advance of go-live and customer
acceptance, where applicable, are deferred as contract liabilities.
Such amounts aggregated approximately $344,000 and $371,000 at
December 31, 2018 and 2017, respectively, and are included in
accrued expenses and other liabilities in our consolidated balance
sheets.
In our
VasoHealthcare business, we bill a portion of commissions on the
orders we booked in advance of delivery of the underlying
equipment. Such amounts aggregated approximately $17,098,000 and
$22,126,000 at December 31, 2018 and 2017, respectively, and are
classified in our consolidated balance sheets into current or
long-term deferred revenue. In addition, we record a contract
liability for amounts expected to be credited back to GEHC due to
customer order reductions. Such amounts aggregated approximately
$2,315,000 and $1,143,000 at December 31, 2018 and 2017,
respectively, and are included in accrued expenses and other
liabilities in our consolidated balance sheets.
In our
VasoMedical business, we bill amounts for post-delivery services
and varying duration service contracts in advance of performance.
Such amounts aggregated approximately $988,000 and $941,000 at
December 31, 2018 and 2017, respectively, and are classified in our
consolidated balance sheets as either current or long-term deferred
revenue.
During
the year ended December 31, 2018, we recognized approximately $7.3
million of revenues that were included in our contract liability
balance at the beginning of such period.
Costs to Obtain or Fulfill a Contract
Topic
606 requires that incremental costs of obtaining a contract are
recognized as an asset and amortized to expense in a pattern that
matches the timing of the revenue recognition of the related
contract. We have determined the only significant incremental costs
incurred to obtain contracts with customers within the scope of
Topic 606 are certain sales commissions paid to associates. In
addition, the Company elected the practical expedient to recognize
the incremental costs of obtaining a contract when incurred for
contracts where the amortization period for the asset the Company
would otherwise have recognized is one year or less.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Under
prior U.S. GAAP, we recognized sales commissions in our equipment
segment as incurred. Under Topic 606, sales commissions applicable
to service contracts exceeding one year have been capitalized and
amortized ratably over the term of the contract. In our IT VAR
business, all commissions paid in advance of go-live were, under
prior U.S. GAAP, capitalized as deferred commission expense and
charged to expense at go-live or customer acceptance, as
applicable. Under Topic 606, IT VAR commissions allocable to
multi-year subscription contracts or multi-year post-contract
support performance obligations are amortized to expense ratably
over the terms of the multi-year periods. IT VAR commissions
allocable to other elements continue to be charged to expense at
go-live or customer acceptance, as was previously done. At the date
of adoption of Topic 606, we recorded an asset, and related
adjustment to retained earnings, of approximately $139,000 in our
consolidated balance sheets for the amount of unamortized sales
commissions for prior periods, as calculated under the new
guidance. The impact to our financial statements of adopting Topic
606, as it relates to costs to obtain contracts, was a reduction in
commission expense of approximately $121,000 for the year ended
December 31, 2018, an increase in deferred commission expense of
approximately $8,000, and an increase in long term deferred
commission expense (recorded in other assets) of approximately
$190,000 (inclusive of the beginning balance adjustment of
$139,000).
In our
professional sales services segment, under both prior U.S. GAAP and
Topic 606, commissions paid to our sales force are deferred until
the underlying equipment is accepted by the customer.
At
December 31, 2018, our consolidated balance sheet includes
approximately $4,562,000 in capitalized sales commissions to be
expensed in future periods, of which $2,585,000 is recorded in
deferred commission expense and $1,977,000, representing the
long-term portion, is included in other assets.
Significant Judgments when Applying Topic 606
Contract
transaction price is allocated to performance obligations using
estimated stand-alone selling price. Judgment is required in
estimating stand-alone selling price for each distinct performance
obligation. We determine stand-alone selling price maximizing
observable inputs such as stand-alone sales when they exist or
substantive renewal price charged to clients. In instances where
stand-alone selling price is not observable, we utilize an estimate
of stand-alone selling price based on historical pricing and
industry practices.
Certain
revenue we record in our professional sales service segment
contains an estimate for variable consideration. Due to the tiered
structure of our commission rate, which increases as annual targets
are achieved, under Topic 606 we record revenue and deferred
revenue at the rate we expect to be achieved by year end. Under
prior U.S. GAAP, we recognized revenue at the rate achieved at the
applicable reporting date. We base our estimate of variable
consideration on historical results of previous years’
achievement under the GEHC agreement. Such estimate will be
reviewed each quarter and adjusted as necessary. The Company
recognized reductions in revenue associated with revisions to
variable consideration for previously completed performance
obligations of $165,000 for the year ended December 31,
2018.
Shipping and Handling Costs
All
shipping and handling expenses are charged to cost of sales.
Amounts billed to customers related to shipping and handling costs
are included as a component of sales.
Research and Development
Research and
development costs attributable to development are expensed as
incurred.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Share-Based Compensation
The
Company complies with ASC Topic 718, “Compensation –
Stock Compensation” (“ASC 718”), and ASC Topic
505, “Equity” (“ASC 505”), which requires
all companies to recognize the cost of services received in
exchange for equity instruments, to be recognized in the financial
statements based on their fair values. For employees and
non-employee directors, the fair value is measured on the grant
date and for non-employees, the fair value is measured on the
measurement date and re-measured at each reporting period until
performance is complete. The Company applies an estimated
forfeiture rate to the grant date fair value to determine the
annual compensation cost of share-based payment arrangements with
employees. The forfeiture rate is estimated based primarily on job
title and prior forfeiture experience. The Company did not grant
any awards to non-employees during the years ended December 31,
2018 and 2017.
During
the year ended December 31, 2018, the Company granted 975,000
restricted shares of common stock valued at $63,000 to non-officer
employees, and 725,000 restricted shares of common stock valued at
$44,000 to officers. The 975,000 shares granted to non-officer
employees vest at various times over three to five years from the
grant date and the 725,000 shares granted to officers vested in
April 2018. The total fair value of shares vested during the year
ended December 31, 2018 was $385,000 for employees. The weighted
average grant date fair value of shares granted during the year
ended December 31, 2018 was $0.06 per share.
During
the year ended December 31, 2017, the Company granted 50,000
restricted shares of common stock valued at $6,000 to non-officer
employees, and 925,000 restricted shares of common stock valued at
$111,000 to officers. The 975,000 shares granted vested on April 1,
2017. The total fair value of shares vested during the year ended
December 31, 2017 was $467,000 for employees. The weighted average
grant date fair value of shares granted during the year ended
December 31, 2017 was $0.12 per share.
The
Company did not grant any stock options during the years ended
December 31, 2018 or 2017, nor were any options exercised during
such periods. No options were outstanding at December 31, 2018 or
2017.
Share-based
compensation expense recognized for the years ended December 31,
2018 and 2017 was $313,000 and $514,000, respectively, and is
recorded in selling, general, and administrative expense in the
consolidated statements of operations and comprehensive loss.
Unrecognized expense related to existing share-based compensation
and arrangements is approximately $207,000 at December 31, 2018 and
will be recognized over a weighted-average period of approximately
12 months.
Cash and Cash Equivalents
Cash
and cash equivalents represent cash and short-term, highly liquid
investments either in certificates of deposit, treasury bills,
money market funds, or investment grade commercial paper issued by
major corporations and financial institutions that generally have
maturities of three months or less from the date of
acquisition.
Accounts Receivable, net
The
Company’s accounts receivable are due from customers to whom
we sell our products and services, distributors engaged in the
distribution of our products and from GEHC. Credit is extended
based on evaluation of a customer’s financial condition and,
generally, collateral is not required. Accounts receivable are
generally due 30 to 90 days from shipment and services provided and
are stated at amounts due from customers net of allowances for
doubtful accounts, returns, term discounts and other allowances.
Accounts that are outstanding longer than the contractual payment
terms are considered past due. Estimates are used in determining
the allowance for doubtful accounts based on the Company’s
historical collections experience, current trends, credit policy
and a percentage of its accounts receivable by aging category. In
determining these percentages, the Company reviews historical
write-offs of their receivables. The Company also looks at the
credit quality of their customer base as well as changes in their
credit policies. The Company continuously monitors collections and
payments from our customers, and writes off receivables when all
efforts at collection have been exhausted. While credit losses have
historically been within expectations and the provisions
established, the Company cannot guarantee that it will continue to
experience the same credit loss rates that they have in the
past.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
The
changes in the Company’s allowance for doubtful accounts and
commission adjustments are as follows:
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
$
4,872
|
$
4,159
|
|
Provision
for losses on accounts receivable
|
460
|
157
|
|
Direct
write-offs, net of recoveries
|
(268
)
|
(212
)
|
|
Commission
adjustments
|
(1,070
)
|
768
|
|
Ending
Balance
|
$
3,994
|
$
4,872
|
Concentrations of Credit Risk
We
market our equipment and IT software solutions principally to
hospitals, diagnostic imaging centers and physician private
practices. We perform credit evaluations of our customers’
financial condition and, as a result, believe that our receivable
credit risk exposure is limited. For the years ended December 31,
2018 and 2017, no customer in our equipment or IT segment accounted
for 10% or more of revenues or accounts receivable. In our
professional sales service segment, 100% of our revenues and
accounts receivable are with GEHC; however, we believe this risk is
acceptable based on GEHC’s financial position and our long
history of doing business with GEHC.
The
Company maintains cash balances in certain U.S. financial
institutions, which, at times, may exceed the Federal Depository
Insurance Corporation (“FDIC”) coverage of
$250,000. The Company has not experienced any losses on these
accounts and believes it is not subject to any significant credit
risk on these accounts. In addition, the FDIC does not insure the
Company’s foreign bank balances, which aggregated
approximately $519,000 and $709,000 at December 31, 2018 and 2017,
respectively.
Inventories, net
The
Company values inventories in the equipment segment at the lower of
cost or net realizable value, with cost being determined on a
first-in, first-out basis. The Company occasionally places
EECP
®
systems and other medical device products at various field
locations for demonstration, training, evaluation, and other
similar purposes at no charge. The cost of these products is
transferred to property and equipment and is amortized over two to
five years. The Company records the cost of refurbished components
of EECP
®
systems and
critical components at cost plus the cost of refurbishment. The
Company regularly reviews inventory quantities on hand,
particularly raw materials and components, and records a provision
for excess and slow moving inventory based primarily on existing
and anticipated design and engineering changes to its products as
well as forecasts of future product demand.
In our
IT Segment, we purchase computer hardware and software for specific
customer requirements and value such inventories using the specific
identification method.
Property and Equipment
Property and
equipment, including assets under capital lease, are stated at cost
less accumulated depreciation and amortization. Major improvements
are capitalized and minor replacements, maintenance and repairs are
charged to expense as incurred. Upon retirement or disposal of
assets, the cost and related accumulated depreciation are removed
from the consolidated balance sheets. Depreciation is expensed over
the estimated useful lives of the assets, which range from two to
eight years, on a straight-line basis. Accelerated methods of
depreciation are used for tax purposes. We amortize leasehold
improvements over the useful life of the related leasehold
improvement or the life of the related lease, whichever is
less.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Goodwill and Intangible Assets
Goodwill represents
the excess of cost over the fair value of net assets of businesses
acquired. The Company accounts for goodwill under the guidance of
the ASC Topic 350, “Intangibles: Goodwill and Other”.
Goodwill acquired in a purchase business combination is not
amortized, but instead tested for impairment, at least annually, in
accordance with this guidance.
The recoverability of goodwill is
subject to an annual impairment test or whenever an event occurs or
circumstances change that would more likely than not result in an
impairment.
The Company tests goodwill for impairment at the
reporting unit level on an annual basis as of December 31 and
between annual tests when an event occurs or circumstances change
that could indicate that the asset might be impaired. In any year,
the Company may elect to perform a qualitative assessment to
determine whether it is more likely than not that the fair value of
a reporting unit is in excess of its carrying value. If the Company
cannot determine qualitatively that the fair value is in excess of
the carrying value, or the Company decides to bypass the
qualitative assessment, the Company proceeds to the quantitative
goodwill impairment test, which compares the fair value of each
reporting unit to its carrying amount, including goodwill. If the
fair value of each reporting unit exceeds its carrying amount,
goodwill is not considered to be impaired. If the carrying amount
of a reporting unit exceeds its fair value, an impairment loss is
recognized for an amount equal to that excess, limited to the total
amount of goodwill allocated to that reporting unit. No impairment
loss was recorded as of December 31, 2018 and 2017.
I
ntangible assets consist of the value of customer
contracts and relationships, patent and technology costs, and
software. The cost of significant customer-related intangibles is
amortized in proportion to estimated total related revenue; cost of
other intangible assets is generally amortized on a straight-line
basis over the asset's estimated economic life, which range
from five to ten years. T
he Company
capitalizes internal use software development costs incurred during
the application development stage. Costs related to preliminary
project activities, training, data conversion, and post
implementation activities are expensed as incurred. The Company
capitalized $527,000 and $398,000 in software development costs for
the years ended December 31, 2018 and 2017,
respectively.
Impairment of Long-lived Assets
The
Company reviews the recoverability of all long-lived assets,
including the related useful lives, whenever events or changes in
circumstances indicate that the carrying amount of a long-lived
asset might not be recoverable. If required, the Company compares
the estimated fair value determined by either the undiscounted
future net cash flows or appraised value to the related
asset’s carrying value to determine whether there has been an
impairment. If an asset is considered impaired, the asset is
written down to fair value, which is based either on discounted
cash flows or appraised values in the period the impairment becomes
known. No assets were determined to be impaired as of
December 31, 2018 and 2017
.
Deferred Revenue
Amounts
billable under the agreement with GEHC in advance of delivery of
the underlying equipment are recorded initially as deferred
revenue, and commission revenue is subsequently recognized as
customer acceptance of such equipment is reported to us by GEHC.
Similarly, commissions payable to our sales force related to such
billings are recorded as deferred commission expense when the
associated deferred revenue is recorded. Commission expense is
recognized when the corresponding commission revenue is
recognized.
We
record revenue on extended service contracts ratably over the term
of the related service contracts. Under the provisions of ASC 606,
we defer revenue related to EECP
®
system sales
for the fair value of installation and in-service training to the
period when the services are rendered and for service obligations
ratably over the service period, which is generally one year. (See
Note I)
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Income Taxes
Deferred income
taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss
carry-forwards for which income tax benefits are expected to be
realized in future years. A valuation allowance is established,
when necessary, to reduce deferred tax assets to the amount
expected to be realized. In estimating future tax consequences, we
generally consider all expected future events other than an
enactment of changes in the tax laws or rates. Deferred tax assets
are continually evaluated for the expected realization. To the
extent our judgment regarding the realization of the deferred tax
assets changes, an adjustment to the allowance is recorded, with an
offsetting increase or decrease, as appropriate, in income tax
expense. Such adjustments are recorded in the period in which our
estimate as to the realization of the assets changed that it is
“more likely than not” that all of the deferred tax
assets will be realized. The “realization” standard is
subjective and is based upon our estimate of a greater than 50%
probability that the deferred tax asset can be
realized.
The
Company also complies with the provisions of ASC Topic 740,
“Income Taxes”, which prescribes a recognition
threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to
be taken in a tax return. For those benefits to be recognized, a
tax position must be more-likely-than-not to be sustained upon
examination by the relevant taxing authority based on the technical
merits. The tax benefit recognized is measured as the largest
amount of benefit that has a greater than fifty percent likelihood
of being realized upon ultimate settlement with the relevant taxing
authority. Derecognition of a tax benefit previously recognized
results in the Company recording a tax liability that reduces
ending retained earnings. Based on its analysis, the Company has
determined that it has not incurred any liability for unrecognized
tax benefits as of
December 31, 2018
and 2017
. The Company recognizes accrued interest and
penalties related to unrecognized tax benefits as income tax
expense. No amounts were accrued for the payment of interest and
penalties at
December 31, 2018 and
2017
. Generally, the Company is no longer subject to income
tax examinations by major domestic taxing authorities for years
before 2015. According to the China tax regulatory framework, there
is no statute of limitations on examination of tax filings by tax
authorities. However, the general practice is going back five
years. Management is currently unaware of any issues under review
that could result in significant payments, accruals or material
deviations from its position.
Foreign Currency Translation (Loss) Gain and Comprehensive
Loss
In
countries in which the Company operates, and the functional
currency is other than the U.S. dollar, assets and liabilities are
translated using published exchange rates in effect at the
consolidated balance sheet date. Equity accounts are
translated at historical rates except for the changes in
accumulated deficit during the year as the result of the income
statement translation process. Revenues and expenses and cash flows
are translated using a weighted average exchange rate for the
period. Resulting translation adjustments are recorded
as a component of accumulated other comprehensive loss on the
accompanying consolidated balance sheets. For the years
ended
December 31, 2018 and
2017
, other comprehensive loss includes (losses) gains of
$(257,000) and $271,000, respectively, which were entirely from
foreign currency translation.
Net Loss Per Common Share
Basic
loss per common share is based on the weighted average number of
common shares outstanding without consideration of potential common
stock. Diluted earnings per common share is based on the weighted
average number of common and potential dilutive common shares
outstanding.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
The
following table represents common stock equivalents that were
excluded from the computation of diluted earnings per share for the
years ended December 31, 2018 and 2017, because the effect of their
inclusion would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
common stock grants
|
2,388
|
4,204
|
Reclassifications
Certain
reclassifications have been made to prior year amounts to conform
with the current year presentation.
Recently Issued Accounting Pronouncements
The
Company continually assesses any new accounting pronouncements to
determine their applicability to the Company. Where it is
determined that a new accounting pronouncement affects the
Company’s financial reporting, the Company undertakes a study
to determine the consequence of the change to its financial
statements and assures that there are proper controls in place to
ascertain that the Company’s consolidated financial
statements properly reflect the change. New pronouncements assessed
by the Company recently are discussed below:
Leases
In
February 2016, The FASB issued ASU 2016-02 (Topic 842),
“Leases”. ASU 2016-02 requires that a lessee recognize
the assets and liabilities that arise from operating leases. A
lessee should recognize in the statement of financial position a
liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying
asset for the lease term. For leases with a term of 12 months or
less, a lessee is permitted to make an accounting policy election
by class of underlying asset not to recognize lease assets and
lease liabilities. In transition, lessees and lessors are required
to recognize and measure leases at either the effective date (the
“effective date method”) or the beginning of the
earliest period presented (the “comparative method”)
using a modified retrospective approach. Under the effective date
method, the Company’s comparative period reporting is
unchanged. In contrast, under the comparative method, the
Company’s date of initial application is the beginning of the
earliest comparative period presented, and the Topic 842 transition
guidance is then applied to all comparative periods presented.
Further, under either transition method, the standard includes
certain practical expedients intended to ease the burden of
adoption. The Company adopted this new standard January 1, 2019
using the effective date method and elected certain practical
expedients allowing the Company not to reassess:
●
whether expired or
existing contracts contain leases under the new definition of a
lease;
●
lease
classification for expired or existing leases; and
●
whether previously
capitalized initial direct costs would qualify for capitalization
under Topic 842.
The
Company also made the accounting policy decision not to recognize
lease assets and liabilities for leases with a term of 12 months or
less. The Company estimates the adoption of this standard on
January 1, 2019 will result in the addition to our consolidated
balance sheet of approximately $1.1 million in right-of-use assets
and lease liabilities. The standard is not expected to have a
material effect on the Company’s consolidated statements of
cash flows or operations.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Goodwill
In
January 2017, the FASB issued ASU 2017-04, which eliminates the
requirement to calculate the implied fair value of goodwill to
measure a goodwill impairment charge. Instead, entities will record
an impairment charge based on the excess of a reporting
unit’s carrying amount over its fair value. The standard is
effective for fiscal periods beginning after December 15, 2019.
Early adoption is permitted for interim and annual goodwill
impairment testing dates after January 1, 2017. The Company early
adopted this standard in December 2018. The adoption did not have a
material effect on the Company’s Consolidated Financial
Statements.
NOTE C
– SEGMENT REPORTING
The Company views its business in three segments
– the IT segment, the professional sales service segment, and
the equipment segment. The IT segment includes the operations of
NetWolves and VasoHealthcare IT Corp. The professional sales
service segment operates through the Vaso Diagnostics subsidiary
and is currently engaged solely in the fulfillment of the
Company’s responsibilities under our agreement with GEHC. The
equipment segment is engaged in designing, manufacturing, marketing
and supporting EECP
®
enhanced external counterpulsation
systems both domestically and internationally, as well as the
development, production, marketing and supporting of other medical
devices.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
The chief operating decision maker is the
Company’s Chief Executive Officer, who, in conjunction with
upper management, evaluates segment performance based on operating
income and Adjusted EBITDA
(earnings before interest, taxes,
depreciation and amortization – defined as net (loss) income,
plus net interest expense (income), tax expense, depreciation and
amortization, and non-cash expenses for share-based compensation).
Administrative functions such as
finance and human resources are centralized and related expenses
allocated to each segment. Other costs not directly attributable to
operating segments, such as audit, legal, director fees, investor
relations, and others, as well as certain assets – primarily
cash balances – are reported in the Corporate entity below.
There are no intersegment revenues. Summary financial information
for the segments is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
|
|
IT
|
$
44,228
|
$
42,581
|
|
Professional
sales service
|
25,511
|
26,443
|
|
Equipment
|
4,241
|
3,764
|
|
Total
revenues
|
$
73,980
|
$
72,788
|
|
|
|
|
|
Gross
Profit
|
|
|
|
IT
|
$
18,379
|
$
17,623
|
|
Professional
sales service
|
20,165
|
20,630
|
|
Equipment
|
2,580
|
2,478
|
|
Total
gross profit
|
$
41,124
|
$
40,731
|
|
|
|
|
|
Operating
(loss) income
|
|
|
|
IT
|
$
(3,748
)
|
$
(3,375
)
|
|
Professional
sales service
|
1,958
|
1,954
|
|
Equipment
|
(812
)
|
(1,066
)
|
|
Corporate
|
(1,122
)
|
(1,345
)
|
|
Total
operating loss
|
$
(3,724
)
|
$
(3,832
)
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
IT
|
$
1,968
|
$
1,822
|
|
Professional
sales service
|
187
|
194
|
|
Equipment
|
367
|
410
|
|
Corporate
|
-
|
-
|
|
Total
depreciation and amortization
|
$
2,522
|
$
2,426
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
IT
|
$
2,496
|
$
2,185
|
|
Professional
sales service
|
4
|
127
|
|
Equipment
|
82
|
43
|
|
Corporate
|
4
|
19
|
|
Total
cash capital expenditures
|
$
2,586
|
$
2,374
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
|
IT
|
$
28,785
|
$
28,320
|
|
Professional
sales service
|
12,193
|
15,658
|
|
Equipment
|
6,992
|
7,830
|
|
Corporate
|
2,504
|
4,970
|
|
Total
assets
|
$
50,474
|
$
56,778
|
For the
years ended December 31, 2018 and 2017, GEHC accounted for 34% and
36% of revenue, respectively. Also, GEHC accounted for $7.2
million, or 66%, and $8.9 million, or 67%, of accounts and other
receivables at December 31, 2018 and 2017,
respectively.
Our
revenues were derived from the following geographic
areas:
|
|
|
|
|
|
|
|
|
|
|
Domestic
(United States)
|
$
71,279
|
$
70,719
|
|
Non-domestic
(foreign)
|
2,701
|
2,069
|
|
|
$
73,980
|
$
72,788
|
NOTE D
– ACCOUNTS AND OTHER RECEIVABLES
The
following table presents information regarding the Company’s
accounts and other receivables as of December 31, 2018 and
2017:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
$
15,016
|
$
18,056
|
|
Due
from employees
|
6
|
41
|
|
Allowance
for doubtful accounts and
|
|
|
|
commission
adjustments
|
(3,994
)
|
(4,872
)
|
|
Accounts
and other receivables, net
|
$
11,028
|
$
13,225
|
Trade
receivables include amounts due for shipped products and services
rendered. Amounts currently due under the GEHC Agreement are
subject to adjustment in subsequent periods should the underlying
sales order amount, upon which the receivable is based,
change.
Allowance for
doubtful accounts and commission adjustments include estimated
losses resulting from the inability of our customers to make
required payments, and adjustments arising from estimated future
changes in sales order amounts that may reduce the amount the
Company will ultimately receive under the GEHC Agreement. Due from
employees primarily reflects commission advances made to sales
personnel.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
NOTE E
– INVENTORIES, NET
Inventories, net of
reserves, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
577
|
$
530
|
|
Work
in process
|
388
|
449
|
|
Finished
goods
|
1,018
|
1,376
|
|
|
$
1,983
|
$
2,355
|
At
December 31, 2018 and 2017, the Company maintained reserves for
slow moving inventories of $636,000 and $746,000,
respectively.
NOTE F
– PROPERTY AND EQUIPMENT
Property and
equipment is summarized as follows:
|
|
|
|
|
|
|
|
Office,
laboratory and other equipment
|
$
3,885
|
$
2,953
|
|
Equipment
furnished for customer
|
|
|
|
or
clinical uses
|
8,167
|
6,615
|
|
Furniture
and fixtures
|
127
|
131
|
|
|
12,179
|
9,699
|
|
Less:
accumulated depreciation and amortization
|
(6,370
)
|
(4,980
)
|
|
Property
and equipment, net
|
$
5,809
|
$
4,719
|
Assets
under capital lease comprised approximately $855,000 and $387,000
of the office, laboratory and other equipment asset class at
December 31, 2018 and 2017, respectively, and approximately $60,000
and $0 of the equipment furnished for customer or clinical use
asset class at December 31, 2018 and 2017, respectively.
Accumulated amortization of assets under capital lease aggregated
approximately $250,000 and $103,000 at December 31, 2018 and 2017,
respectively. Depreciation expense amounted to approximately
$1,489,000 and $1,290,000 for the years ended December 31, 2018 and
2017, respectively. Amortization of assets under capital lease is
included in depreciation expense.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
NOTE G
– GOODWILL AND OTHER INTANGIBLES
Goodwill of
$14,375,000 is attributable to the NetWolves reporting unit within
the IT segment. The remaining $2,934,000 of goodwill is
attributable to the FGE reporting unit within the Equipment
segment. The NetWolves and FGE reporting units had negative net
asset carrying amounts at December 31, 2018 and 2017. The changes
in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
$
17,471
|
$
17,280
|
|
Foreign
currency translation adjustment
|
(162
)
|
191
|
|
End
of year
|
$
17,309
|
$
17,471
|
The
Company’s other intangible assets consist of capitalized
customer-related intangibles, patent and technology costs, and
software costs, as set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
|
|
|
Costs
|
$
5,831
|
$
5,831
|
|
Accumulated
amortization
|
(3,083
)
|
(2,501
)
|
|
|
2,748
|
3,330
|
|
|
|
|
|
Patents
and Technology
|
|
|
|
Costs
|
2,363
|
2,331
|
|
Accumulated
amortization
|
(1,532
)
|
(1,260
)
|
|
|
831
|
1,071
|
|
|
|
|
|
Software
|
|
|
|
Costs
|
2,346
|
1,819
|
|
Accumulated
amortization
|
(1,185
)
|
(966
)
|
|
|
1,161
|
853
|
|
|
|
|
|
|
$
4,740
|
$
5,254
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
The
Company owns four US utility patents that expire at various times
through 2023, and, through our Chinese subsidiaries, we own sixteen
invention and utility patents that expire at various times through
2028, as well as fourteen software copyright certificates in China
related to proprietary technologies in physiological data
acquisition, analysis and reporting. The Company also holds one
patent for secure and remote monitoring management through its
NetWolves subsidiary. Costs incurred for submitting the
applications to the United States Patent and Trademark Office and
other foreign authorities for these patents have been capitalized.
Patent and technology costs are being amortized using the
straight-line method over 10-year and 8-year lives, respectively.
The Company begins amortizing patent costs once a filing receipt is
received stating the patent serial number and filing date from the
Patent Office or other foreign authority.
The cost of
significant customer-related intangibles is amortized in proportion
to estimated total related revenue; cost of other customer-related
intangible assets is amortized on a straight-line basis over the
asset's estimated economic life of seven years
. Software
costs are amortized on a straight-line basis over its expected
useful life of five years.
Amortization
expense amounted to approximately $1,033,000 and $1,136,000 for the
years ended December 31, 2018 and 2017, respectively. Amortization
of intangibles for the next five years is:
|
|
Years
ending December 31,
|
|
|
2019
|
1,017
|
|
2020
|
934
|
|
2021
|
858
|
|
2022
|
562
|
|
2023
|
328
|
|
Total
|
$
3,699
|
NOTE H
– OTHER ASSETS
Other
assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
commission expense - noncurrent
|
$
1,978
|
$
1,867
|
|
Trade
receivables - noncurrent
|
630
|
968
|
|
Other,
net of allowance for loss on loan receivable of
|
|
|
|
$412
at December 31, 2018 and 2017
|
459
|
1,012
|
|
|
$
3,067
|
$
3,847
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
NOTE I
– DEFERRED REVENUE
The
changes in the Company’s deferred revenues are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue at beginning of year
|
$
23,066
|
$
19,404
|
|
Net
additions:
|
|
|
|
Deferred
extended service contracts
|
687
|
705
|
|
Deferred
in-service and training
|
8
|
20
|
|
Deferred
service arrangements
|
15
|
43
|
|
Deferred
commission revenues
|
4,960
|
14,779
|
|
Recognized
as revenue:
|
|
|
|
Deferred
extended service contracts
|
(628
)
|
(661
)
|
|
Deferred
in-service and training
|
(5
)
|
(20
)
|
|
Deferred
service arrangements
|
(31
)
|
(45
)
|
|
Deferred
commission revenues
|
(9,986
)
|
(11,159
)
|
|
Deferred
revenue at end of year
|
18,086
|
23,066
|
|
Less:
current portion
|
10,382
|
15,540
|
|
Long-term
deferred revenue at end of year
|
$
7,704
|
$
7,526
|
NOTE J
– ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued
expenses and other liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation
|
$
648
|
$
1,181
|
|
Accrued
expenses - other
|
2,092
|
2,207
|
|
Other
liabilities
|
2,915
|
1,949
|
|
|
$
5,655
|
$
5,337
|
NOTE K
– RELATED-PARTY TRANSACTIONS
In
March 2018, the Company sold its interest in the VSK joint venture
to PSK for a sales price of $676,000 and executed a distributorship
agreement, expiring December 31, 2020, with VSK for the sale of the
Company’s EECP® products in certain international
markets. The sale resulted in a gain of approximately $212,000 and
net cash proceeds of approximately $311,000 after satisfaction of
deposits and other payables due to VSK aggregating approximately
$365,000 at time of sale. Prior to the sale, the Company’s
pro-rata share in VSK’s loss from operations approximated
$20,000 for the year ended December 31, 2017, and $9,000 for the
three months ended March 31, 2018, and is included in interest and
other income, net in the accompanying consolidated statements of
operations and comprehensive loss.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
David
Lieberman, a practicing attorney in the State of New York, serves
as Vice Chairman of the Board of Directors. He is
currently a senior partner at the law firm of Beckman, Lieberman
& Barandes, LLP, which performs certain legal services for the
Company. Fees of approximately $340,000 were billed by the firm for
each of the years ended December 31, 2018 and 2017, at which dates
$28,000 and $0 were outstanding, respectively.
On August 6, 2014 the Company acquired all of the
outstanding shares of Genwell Instruments Co. Ltd.
(“Genwell”), located in Wuxi, China for cash and notes
of Chinese Yuan RMB13,250,000 (approximately $2,151,000 at the
acquisition date).
The Company issued the RMB6,250,000 note
as part of the acquisition payment and, in May 2015, modified the
note to change the interest rate from 5% to 9% per annum, effective
August 28, 2015, and to extend the maturity date from August 26,
2015 to August 26, 2019.
In July 2017
and October 2017, the Company made partial principal payments
aggregating RMB2,250,000 (approximately $335,000), plus accrued
interest, on notes payable to the president of LET and the
president of Biox.
Unsecured notes and accrued interest
aggregating approximately $335,000, and $354,000 was payable to
officers of Biox at December 31, 2018 and 2017,
respectively.
In
November and December 2018, the Company issued unsecured notes
aggregating $500,000 to certain directors. The notes bore interest
at 10% per annum and matured on March 25, 2019. Principal and
interest on these notes were paid off upon maturity.
NOTE L
– NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes
payable and capital lease obligations consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit
|
$
4,171
|
$
3,393
|
|
Unsecured
term loan
|
145
|
153
|
|
Note
payable
|
14
|
-
|
|
Notes
payable - MedTech (net of $14 and $46 in
|
|
|
|
debt
issue costs at December 31, 2018 and 2017)
|
4,786
|
4,754
|
|
Notes
payable - related parties
|
827
|
345
|
|
Capital
lease obligations
|
588
|
208
|
|
Total
debt and lease obligations
|
10,531
|
8,853
|
|
Less:
current portion (including related parties)
|
(9,886
)
|
(3,760
)
|
|
|
$
645
|
$
5,093
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Line of Credit
In November 2018, NetWolves' lending institution
extended its $4.0 million line of credit.
Advances under the
line, which expires on June 28, 2019, bear interest at a rate of
LIBOR plus 3% (aggregating 5.52% at December 31, 2018 and 3.82% at
December 31, 2017, based on the rate of LIBOR plus 2.25% in effect
at such date) and are secured by substantially all of the assets of
NetWolves Network Services, LLC and guaranteed by Vaso Corporation.
At December 31, 2018, the Company had drawn approximately $2.9
million against the line.
In November 2018, the Company’s lending
institution extended its $2.0 million line of credit agreement with
the same institution. Advances under the line, which expires on
June 28, 2019, bear interest at a rate of LIBOR plus 3%
(aggregating 5.52% at December 31, 2018)
and are secured by substantially all of the assets
of the Company.
At December 31, 2018, the Company had drawn
approximately $1.25 million against the line
. The line of credit agreement includes certain
financial covenants. At December 31, 2018 and 2017, the Company was
not in compliance with both such covenants, and the lending
institution waived the covenants through June 28,
2019.
Unsecured Term Loan
In
December 2018, Biox extended its one-year unsecured term loan of
RMB1,000,000 (approximately $145,000)
with a Chinese bank for an additional year maturing on December 6,
2019. The loan bears interest at 4.79% per
year.
Notes Payable
The
Company financed certain FGE equipment purchases through an
interest-free note payable to a Chinese bank. The note, which is
secured by the financed equipment, is payable in 18 monthly
installments ending in December 2019.
On May
29, 2015, the Company entered into a Note Purchase Agreement with
MedTechnology Investments, LLC (“MedTech”) pursuant to
which it issued MedTech a secured subordinated promissory note
(“Note”) for $3,800,000 for the purchase of NetWolves.
MedTech was formed to acquire the Note, and $1,950,000 of the
aggregate funds used to acquire the Note was provided by six of our
directors. In June 2015, a second Note for $750,000 was issued to
MedTech for working capital purposes, of which $250,000 was
provided by a director and a director’s relative. In July
2015, an additional $250,000 was borrowed under the Note Purchase
Agreement. The Notes bear interest at an annual rate of 9%, mature
on May 29, 2019, may be prepaid without penalty, and are
subordinated to any current or future Senior Debt as defined in the
Subordinated Security Agreement. The Subordinated Security
Agreement secures payment and performance of the Company’s
obligations under the Notes and as a result, MedTech was granted a
subordinated security interest in the Company’s
assets.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Capital lease obligations
In July
2016, the Company entered into two three-year lease agreements for
network equipment installed at its Florida data center. In
September 2018, the Company entered into a capital lease, payable
quarterly over a 60-month term, for primarily the acquisition of
network components in its Florida data center. The fair market
value and capital lease liability of the leased equipment at
inception was approximately $399,000, of which approximately
$78,000 is recorded in current liabilities. In November 2018, the
Company entered into an additional capital lease, payable monthly
over a 43-month term, for the acquisition of additional network
components in its Florida data center. The fair market value and
capital lease liability of the leased equipment at inception was
approximately $130,000, of which approximately $29,000 is recorded
in current liabilities. Assets under capital leases and related
accumulated amortization is recorded under property and equipment
in the accompanying consolidated balance sheets. The future
minimum lease payments as of December 31, 2018 are set forth in the
following table:
Years ending December
31,
|
|
|
2019
|
231
|
|
2020
|
146
|
|
2021
|
146
|
|
2022
|
120
|
|
2023
|
47
|
|
|
690
|
|
Portion
representing interest
|
(85
)
|
|
Portion
representing executory costs
|
(17
)
|
|
Total
capital lease obligations
|
$
588
|
Total
amounts payable by the Company under its various notes payable and
capital lease obligations outstanding as of December 31, 2018
are:
|
|
|
|
|
|
Years ending December 31,
|
|
|
|
|
|
|
|
|
|
2019
|
9,712
|
$
188
|
$
9,900
|
|
2020
|
245
|
116
|
361
|
|
2021
|
-
|
126
|
126
|
|
2022
|
-
|
112
|
112
|
|
2023
|
-
|
46
|
46
|
|
Total
|
$
9,957
|
$
588
|
$
10,545
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
NOTE M
– STOCKHOLDERS' EQUITY
Chinese subsidiaries dividends and statutory reserves
The
payment of dividends by entities organized in China is subject to
limitations. In particular, regulations in China currently permit
payment of dividends only out of accumulated profits as determined
in accordance with PRC accounting standards and regulations. Based
on People’s Republic of China (PRC) accounting standards, our
Chinese subsidiaries are also required to set aside at least 10% of
after-tax profit each year to their general reserves until the
accumulative amount of such reserves reaches 50% of the registered
capital. As of December 31, 2018 and 2017, statutory reserves
aggregating approximately $35,000 were recorded in the
Company’s consolidated balance sheets. These reserves are not
distributable as cash dividends. In addition, they are required to
allocate a portion of their after-tax profit to their staff welfare
and bonus fund at the discretion of their respective boards of
directors. Moreover, if any of our PRC subsidiaries incurs debt on
its own behalf in the future, the instruments governing the debt
may restrict its ability to pay dividends or make other
distributions to us. Distribution of dividends from the Chinese
operating companies to foreign shareholders is subject to a 10%
withholding tax.
NOTE N
- OPTION PLANS
2010 Stock Option and Stock Issuance Plan
On June
17, 2010 the Board of Directors approved the 2010 Stock Plan (the
“2010 Plan”) for officers, directors, employees and
consultants of the Company. The stock issuable under the 2010 Plan
shall be shares of the Company’s authorized but unissued or
reacquired common stock. The maximum number of shares of common
stock which may be issued under the 2010 Plan is 5,000,000
shares.
The
2010 Plan is comprised of two separate equity programs, the Options
Grant Program, under which eligible persons may be granted options
to purchase shares of common stock, and the Stock Issuance Program,
under which eligible persons may be issued shares of common stock
directly, either through the immediate purchase of such shares or
as a bonus for services rendered to the Company.
The
2010 Plan provides that the Board of Directors, or a committee of
the Board of Directors, will administer it with full authority to
determine the identity of the recipients of the options or shares
and the number of options or shares. Options granted under the 2010
Plan may be either incentive stock options or non-qualified stock
options. The option price shall be 100% of the fair market value of
the common stock on the date of the grant (or in the case of
incentive stock options granted to any individual stockholder
possessing more than 10% of the total combined voting power of all
voting stock of the Company, 110% of such fair market value). The
term of any option may be fixed by the Board of Directors, or its
authorized committee, but in no event shall it exceed five years
from the date of grant. Options are exercisable upon payment in
full of the exercise price, either in cash or in common stock
valued at fair market value on the date of exercise of the
option.
No
shares or options were granted under the 2010 Plan during the year
ended December 31, 2018.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
2013 Stock Option and Stock Issuance Plan
On
October 30, 2013, the Board of Directors approved the 2013 Stock
Plan (the “2013 Plan”) for officers, directors,
employees and consultants of the Company. The stock issuable under
the 2013 Plan shall be shares of the Company’s authorized but
unissued or reacquired common stock. The maximum number of shares
of common stock which may be issued under the 2013 Plan is
7,500,000 shares.
The
2013 Plan is comprised of two separate equity programs, the Options
Grant Program, under which eligible persons may be granted options
to purchase shares of common stock, and the Stock Issuance Program,
under which eligible persons may be issued shares of common stock
directly, either through the immediate purchase of such shares or
as a bonus for services rendered to the Company. The 2013 Plan
provides that the Board of Directors, or a committee of the Board
of Directors, will administer it with full authority to determine
the identity of the recipients of the options or shares and the
number of options or shares.
During
the year ended December 31, 2018, 475,000 shares of common stock
were granted under the 2013 Plan, 320,416 shares were forfeited,
and 70,725 shares were withheld for withholding taxes.
No
options were granted under the 2013 Plan during the year ended
December 31, 2018.
2016 Stock Option and Stock Issuance Plan
On
June 15, 2016, the Board of Directors ("Board") approved the 2016
Stock Plan (the "2016 Plan") for officers, directors, and senior
employees of the Corporation or any subsidiary of the
Corporation. The stock issuable under the 2016 Plan shall be
shares of the Company's authorized but unissued or reacquired
common stock. The maximum number of shares of common stock
that may be issued under the 2016 Plan is 7,500,000
shares.
The
2016 Plan consists of a Stock Issuance Program, under which
eligible persons may, at the discretion of the Board, be issued
shares of common stock directly, as a bonus for services rendered
or to be rendered to the Corporation or any subsidiary of the
Corporation.
In
March 2018, 725,000 restricted shares of common stock under the
2016 Plan were granted to officers. The shares vested in April
2018. In June 2018, the Company granted 500,000 shares of
restricted common stock to employees, vesting over a three-year
period.
No
options were granted under the 2016 Plan during the year ended
December 31, 2018.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
The
following table summarizes non-vested restricted shares for the
year ended December 31, 2018:
|
|
Shares
Available for Future Issuance
|
|
Weighted
Average Grant Date Fair Value
|
|
Balance
at December 31, 2016
|
4,031,946
|
6,763,125
|
$
0.16
|
|
Authorized
|
-
|
-
|
$
-
|
|
Granted
|
(975,000
)
|
975,000
|
$
0.12
|
|
Vested
|
-
|
(3,380,437
)
|
$
0.15
|
|
Forfeited
|
153,730
|
(153,730
)
|
$
0.16
|
|
Balance
at December 31, 2017
|
3,210,676
|
4,203,958
|
$
0.16
|
|
Authorized
|
-
|
-
|
$
-
|
|
Granted
|
(1,700,000
)
|
1,700,000
|
$
0.06
|
|
Vested
|
-
|
(3,125,317
)
|
$
0.14
|
|
Forfeited
|
391,141
|
(391,141
)
|
$
0.16
|
|
Balance
at December 31, 2018
|
1,901,817
|
2,387,500
|
$
0.12
|
There
were 68,543,396 remaining authorized shares of common stock after
reserves for all stock option plans.
NOTE O
- INCOME TAXES
The Tax
Cuts and Jobs Act (the “Tax Act”) was enacted on
December 22, 2017. The Tax Act reduces the maximum U.S. federal
corporate tax rate from 35% to 21%, allows net operating losses
incurred in 2018 and beyond to be carried forward indefinitely,
allows alternative minimum tax carryforwards to be partially
refunded, beginning in 2018, and fully refunded by 2021, and
creates new taxes on certain foreign sourced earnings.
The
following is a geographical breakdown of loss before the provision
for income taxes:
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
(3,967
)
|
$
(4,161
)
|
|
Foreign
|
(152
)
|
(244
)
|
|
Loss
before provision for income taxes
|
$
(4,119
)
|
$
(4,405
)
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
The
provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Current
provision (benefit)
|
|
|
|
Federal
|
$
-
|
$
(154
)
|
|
State
|
63
|
59
|
|
Foreign
|
35
|
13
|
|
Total
current provision (benefit)
|
98
|
(82
)
|
|
|
|
|
|
Deferred
provision (benefit)
|
|
|
|
Federal
|
(376
)
|
168
|
|
State
|
(107
)
|
48
|
|
Foreign
|
-
|
-
|
|
Total
deferred provision (benefit)
|
(483
)
|
216
|
|
|
|
|
|
Total
income tax provision (benefit)
|
$
(385
)
|
$
134
|
|
|
|
|
|
Effective
income tax rate
|
9.35
%
|
-3.04
%
|
Income
tax benefit for the year ended December 31, 2018 was $385,000 due
primarily to $483,000 in tax benefit related to deferred tax
liabilities arising from goodwill generated by the NetWolves
acquisition and $63,000 in state income taxes.
The
following is a reconciliation of the effective income tax rate to
the federal statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
21.00
|
34.00
|
|
State
income taxes
|
(0.87
)
|
(1.34
)
|
|
Change
in valuation allowance
|
|
|
|
relating
to operations
|
(7.75
)
|
(42.38
)
|
|
Impact
of federal statutory rate change
|
-
|
(6.44
)
|
|
Impact
of federal statutory rate change on
|
|
|
|
valuation
allowance
|
-
|
13.74
|
|
Foreign
tax rate differential
|
-
|
(2.20
)
|
|
R&D
credit
|
(0.22
)
|
-
|
|
Nondeductible
expenses
|
(3.09
)
|
(1.93
)
|
|
Minimum
tax credit refundable
|
-
|
3.51
|
|
Other
|
0.28
|
-
|
|
|
9.35
|
(3.04
)
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
The
effective tax rate increased mainly due to the change from tax
expense in 2017 to tax benefit in 2018.
As of
December 31, 2018, the recorded deferred tax assets were
$14,983,000, reflecting an increase of $1,868,000 during the year
ended December 31, 2018, which was offset by a valuation allowance
of $12,077,000, reflecting an increase of $319,000.
The
components of our deferred tax assets and liabilities are
summarized as follows:
|
|
|
|
|
|
|
|
Deferred
Tax Assets:
|
|
|
|
Net
operating loss carryforwards
|
$
12,402
|
$
10,623
|
|
Amortization
|
304
|
262
|
|
Stock-based
compensation
|
16
|
49
|
|
Allowance
for doubtful accounts
|
88
|
36
|
|
Reserve
for obsolete inventory
|
239
|
235
|
|
Tax
credits
|
429
|
438
|
|
Expense
accruals
|
392
|
579
|
|
Excess
interest carryforwards
|
171
|
-
|
|
Deferred
revenue
|
942
|
893
|
|
Total
gross deferred taxes
|
14,983
|
13,115
|
|
Valuation
allowance
|
(12,077
)
|
(11,758
)
|
|
Net
deferred tax assets
|
2,906
|
1,357
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
Deferred
commissions
|
(245
)
|
(224
)
|
|
Goodwill
|
(927
)
|
(668
)
|
|
Differences
in timing of revenue recognition
|
(124
)
|
(112
)
|
|
Depreciation
|
(1,360
)
|
(573
)
|
|
Total
deferred tax liabilities
|
(2,656
)
|
(1,577
)
|
|
|
|
|
|
Total
deferred tax assets (liabilities)
|
250
|
(220
)
|
|
|
|
|
|
|
|
|
|
Recorded
as:
|
|
|
|
Non-current
deferred tax assets
|
374
|
-
|
|
Non-current
deferred tax liabilities
|
(124
)
|
(220
)
|
|
Total
deferred tax assets (liabilities)
|
$
250
|
$
(220
)
|
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
The
activity in the valuation allowance is set forth
below:
|
|
|
|
|
|
|
|
Valuation
allowance, January 1,
|
$
11,758
|
$
15,695
|
|
Change
in valuation allowance
|
319
|
(3,937
)
|
|
Valuation
allowance, December 31,
|
$
12,077
|
$
11,758
|
At
December 31, 2018, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $39
million expiring at various dates from 2020 through 2037 and
approximately $7 million with no expiration date.
Under
current tax law, the utilization of tax attributes will be
restricted if an ownership change, as defined, were to occur.
Section 382 of the Internal Revenue Code provides, in general, that
if an “ownership change” occurs with respect to a
corporation with net operating and other loss carryforwards, such
carryforwards will be available to offset taxable income in each
taxable year after the ownership change only up to the
“Section 382 Limitation” for each year (generally, the
product of the fair market value of the corporation’s stock
at the time of the ownership change, with certain adjustments, and
a specified long-term tax-exempt bond rate at such time). The
Company’s ability to use its loss carryforwards will be
limited in the event of an ownership change.
NOTE P
- COMMITMENTS AND CONTINGENCIES
Sales representation agreement
In
December 2017, the Company concluded an amendment of the GEHC
Agreement with GEHC, originally signed on May 19, 2010. The
amendment extends the term of the original agreement, which began
on July 1, 2010 and was previously extended in 2012 and 2015,
through December 31, 2022, subject to early termination under
certain circumstances, making it the longest extension thus far
with a remaining term of five years from December 31, 2017. Under
the agreement, VasoHealthcare is the exclusive representative for
the sale of select GE Healthcare diagnostic imaging products to
specific market segments/accounts in the 48 contiguous states of
the United States and the District of Columbia. The circumstances
under which early termination of the agreement may occur include:
not materially achieving certain sales goals, not maintaining a
minimum number of sales representatives, and not meeting various
legal and GEHC policy requirements. The Company did not meet the
contractual sales goals in 2018. Under the terms of the agreement,
the Company is required to lease dedicated computer equipment from
GEHC for connectivity to their network and share certain GEHC sales
costs.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Facility Leases
The
Company leases a facility in Plainview, New York, under a
seven-year agreement expiring in September 2022. The Company also
leases offices in New York City under a three-year agreement
expiring May 2020. NetWolves houses its operations in leased
facilities in Tampa, Florida, under an agreement expiring in May
2020. VHC-IT leases a facility in Nashville, Tennessee pursuant to
a one-year lease expiring April 2019. The Company is evaluating
possible renewal options and believes sufficient space is available
at similar cost in Nashville. FGE leases facilities in Wuxi, China,
pursuant to leases expiring in September 2019, August 2020,
September 2020, and December 2020. Such leases are renewable upon
expiration.
Vehicle Lease Agreement
The
Company provides leased vehicles to the sales team of its
professional sales service segment under a closed-end master lease
agreement. Vehicles obtained under the terms of the agreement are
leased generally for a 36-month term, and payments are fixed for
each year of the agreement, subject to readjustment at the
beginning of the second and third year.
Future
rental payments under these operating leases aggregate
approximately as follows:
For the years
ending December
31,
|
|
(in
thousands)
|
|
|
|
|
|
|
2019
|
$
289
|
$
380
|
$
669
|
|
2020
|
195
|
230
|
425
|
|
2021
|
53
|
76
|
129
|
|
2022
|
-
|
55
|
55
|
|
Total
|
$
537
|
$
741
|
$
1,278
|
Rental
expense for all operating leases totaled approximately $816,000 and
$770,000 for the years ended December 31, 2018 and 2017,
respectively.
Employment Agreements
On
March 21, 2011, the Company entered into an Employment Agreement
with its President and Chief Executive Officer, Dr. Jun Ma, for a
three-year term ended on March 14, 2014. The agreement was amended
in 2013 and again in 2015 to provide for a continuing three-year
term, unless earlier terminated by the Company, but in no event can
extend beyond March 14, 2021. The Employment Agreement currently
provides for annual compensation of $375,000. Dr. Ma shall be
eligible to receive a bonus for each fiscal year thereafter during
the employment term. The amount and the occasion for payment of
such bonus, if any, shall be at the discretion of the Board of
Directors. Dr. Ma shall also be eligible for an award under any
long-term incentive compensation plan and grants of options and
awards of shares of the Company’s stock, as determined at the
Board of Directors’ discretion. The Employment Agreement
further provides for reimbursement of certain expenses, and certain
severance benefits in the event of termination prior to the
expiration date of the Employment Agreement.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
On June
1, 2015, the Company entered into an Employment Agreement with Mr.
Peter Castle to be its Chief Operating Officer. The agreement
provides for a three-year term ending on June 1, 2018 and shall
extend for additional one-year periods annually commencing June 1,
2018, unless earlier terminated by the Company, but in no event can
extend beyond June 1, 2021. The Employment Agreement currently
provides for annual compensation of $350,000. Mr. Castle shall be
eligible to receive a bonus for each fiscal year thereafter during
the employment term. The amount and the occasion for payment of
such bonus, if any, shall be at the discretion of the Board of
Directors. Mr. Castle shall also be eligible for an award under any
long-term incentive compensation plan and grants of options and
awards of shares of the Company’s stock, as determined at the
Board of Directors’ discretion. The Employment Agreement
further provides for reimbursement of certain expenses, and certain
severance benefits in the event of termination prior to the
expiration date of the Employment Agreement.
Licensing and Support Service Agreement
In
2010, NetWolves executed a licensing and support service agreement
for the upgrade of its billing system. The agreement initially was
set to expire in December 2014; however, it was extended for a
period of two years in June 2013 with an automatic one-year renewal
thereafter. In December 2017, the agreement was renewed for an
additional three years, expiring December 2020. The agreement
provides for monthly recurring charges based on a percentage of
billed revenues using these services, which charges aggregated
approximately $331,000 and $400,000 for the years ended December
31, 2018 and 2017, respectively.
Letters of Credit
At
December 31, 2018 we are contingently liable under two standby
letters of credit approximating $270,500 in total. The letters of
credit are being maintained as security for payments to two
vendors.
Litigation
The
Company is currently, and has been in the past, a party to various
routine legal proceedings, primarily employee related matters,
incident to the ordinary course of business. The Company believes
that the outcome of all such pending legal proceedings in the
aggregate is unlikely to have a material adverse effect on the
business or consolidated financial condition of the
Company.
Foreign operations
During
the years ended December 31, 2018 and 2017, the Company had and
continues to have operations in China. Operating
transactions in China are denominated in the
Chinese currency called RMB, which is not freely convertible into
foreign currencies.
Operating internationally involves
additional risks relating to such things as currency exchange
rates, different legal and regulatory environments, political,
economic risks relating to the stability or predictability of
foreign governments, differences in the manner in which different
cultures do business, difficulties in staffing and managing foreign
operations, differences in financial reporting, operating
difficulties, and other factors.
Vaso
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2018 and 2017
Commercial law is
still developing in China and there are limited legal precedents to
follow in commercial transactions. There are many tax jurisdictions
each of which may have changing tax laws. Applicable taxes include
value added taxes (“VAT”), Enterprise Income Tax, and
social (payroll) taxes. Regulations are often unclear. Tax
declarations (reports) are subject to review and taxing authorities
may impose fines, penalties and interest. These facts create risks
in China.
NOTE Q
- 401(k) PLANS
The
Company maintains a defined contribution plan to provide retirement
benefits for its employees - the Vaso Corporation 401(k) Plan
adopted in April 1997. As allowed under Section 401(k) of the
Internal Revenue Code, the plan provides tax-deferred salary
deductions for eligible employees. Employees are eligible to
participate in the next quarter enrollment period after employment
and participants may make voluntary contributions to the plan up to
80% of their compensation. In the years ended December 31, 2018 and
2017 the Company made discretionary contributions of approximately
$96,000 and $116,000, respectively, to match a percentage of
employee contributions.
NOTE R
– SUBSEQUENT EVENTS
In
accordance with the original acquisition agreement of Gentone by
FGE, in March 2019 the Company’s subsidiary Gentone exercised
its option to acquire all of the shares of Biox.
Subsequent to December 31, 2018, the Company
issued notes aggregating $750,000 to certain directors, employees,
and a shareholder. The notes mature at various periods
through April 3, 2020 and bear interest at 10% per annum payable
quarterly.
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